Income and Price Changes: Graphs + 4 Practice Questions

The budget line isn’t fixed — it moves whenever income or prices change. Understanding how it moves is crucial: a parallel shift means different purchasing power, while a rotation means a different trade-off between goods.

Key Term

Shifts vs. Rotations

Income change $\to$ parallel shift. The slope stays the same (prices haven’t changed), but the entire line moves outward (income up) or inward (income down).

Price change $\to$ rotation (pivot). If $P_{X}$ changes, the budget line pivots around the $Y$ -intercept (which depends only on $I$ and $P_{Y}$ ). The slope $- P_{X} / P_{Y}$ changes, altering the trade-off rate.

Interactive — Income change: parallel shift

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I = 100 dollars walks to 150 and back to 60 with prices fixed. Both intercepts scale, slope unchanged.

Interactive — Price change: rotation around the y-intercept

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P_X moves 5 → 2.50 → 10. Y-intercept stays at 10; only X-intercept and slope move.

Think of it this way. An income increase is like getting a bigger playing field — you can reach more of both goods, but the relative price of one good in terms of the other hasn’t changed. A price decrease for good $X$ , on the other hand, stretches the budget line along the $X$ -axis (you can now buy more $X$ ) while the $Y$ -intercept stays put.

When $I$ changes, the intercept $I / P_{Y}$ shifts but the slope $- P_{X} / P_{Y}$ stays the same. When $P_{X}$ changes, the slope changes and the $X$ -intercept $I / P_{X}$ moves.

Check yourself · no marks

Your income doubles while both prices stay the same. What happens to the budget line?

Commit to one first. Guessing and being wrong beats reading the answer cold.

Worked Example

You have $I = 100$ , $P_{X} = 5$ , $P_{Y} = 10$ . (a) Draw the original budget line intercepts. (b) Income rises to 150 dollars — what happens? (c) Instead, $P_{X}$ falls to 2.50 dollars (income stays at 100 dollars) — what happens?

Tip

Quick check

If the slope changed, a relative price changed. If the slope stayed the same but the line moved, income changed — or both prices changed by the same percentage, which has the same effect. This is a reliable way to read budget-line diagrams on exams.

Practice · 1 / 4

Wrong answers cost no XP

Test your understanding of budget line movements:

Income = 90 dollars, $P_{X} = 3$ , $P_{Y} = 9$ . Income increases to 180 dollars. What is the new X-intercept?

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