A budget line shows the combinations of two goods that a consumer can afford given their income and the prices of those goods. A shift in the budget line indicates a change in the consumer's purchasing power. Here are three factors that can cause a shift:

• Change in Income: An increase in income leads to a rightward shift of the budget line. This is because the consumer can now afford more of both goods. Conversely, a decrease in income results in a leftward shift.

  Example: If a consumer receives a pay rise, they can afford to buy more of both their usual goods (e.g., food and clothing) at the same prices, shifting their budget line outwards.

• Change in the Price of a Good: A change in the relative price of a good affects the slope of the budget line. If the price of a good increases, the budget line will pivot inwards. If the price of a good decreases, the budget line will pivot outwards.

  Example: If the price of coffee increases, the consumer can now buy less coffee for the same amount of money, and therefore less of other goods. This results in a steeper, inward-sloping budget line.

• Change in the Price of the Other Good: Similar to a change in the price of a good, a change in the price of the other good also affects the slope of the budget line. If the price of the other good increases, the budget line will pivot inwards. If the price of the other good decreases, the budget line will pivot outwards.

  Example: If the price of petrol increases, the consumer has less money available for other goods and services. This leads to a steeper, inward-sloping budget line.

These shifts illustrate how changes in economic conditions directly impact consumer choices and welfare.

Explanation:

Inelastic demand means that the quantity demanded of a good changes very little in response to a change in its price. If the price of an inelastic good increases, the consumer will reduce their consumption of that good by a relatively small amount. However, the increase in price will still have a significant impact on the consumer's budget.

Effect on Budget Line:

If the price of an inelastic good increases, the budget line will pivot inwards. The slope of the budget line will become steeper. This is because the consumer is forced to reduce their consumption of the inelastic good, leaving less money available for the other good. The budget line will still be downward sloping, but it will be steeper than before.

Implications for Spending Decisions:

Because the demand is inelastic, the consumer has limited ability to substitute away from the good whose price has increased. Therefore, the consumer will likely continue to purchase a relatively similar quantity of the good, even at the higher price. However, they will have less money available to spend on other goods and services. This means the consumer will have to make difficult choices about which goods to prioritize, potentially reducing their overall level of utility. The consumer's spending decisions will be constrained by the higher price of the inelastic good.

Diagram:

A diagram should show a standard budget line with two goods (e.g., X and Y) plotted on the axes. The budget line should be downward sloping, representing the trade-off between the two goods. The diagram should then show the budget line shifting outwards, parallel to the original budget line. The new budget line should be further away from the origin.

Explanation:

An increase in income allows the consumer to purchase more of both goods. Since the income is increased proportionally, the slope of the budget line remains the same. The budget line shifts outwards because the consumer can now afford a greater quantity of both goods at the same prices. This represents an expansion of the consumer's consumption possibilities.

Implications for Consumer Choice:

The outward shift of the budget line provides the consumer with more options. They can now afford to consume more of both goods, or they can reallocate their spending between the two goods. The consumer's optimal choice will depend on their preferences and the marginal utility they derive from each good. The consumer will aim to maximise their utility given their new budget constraint.