Lesson 2: Budget line (Part 1) Grade 12- Ms Wassila EL

Lesson 2: Budget line Part 1 [This lesson starts from where we has stopped in class]

Students are requested to the notes below, leaving space where required for diagram which will be
done in online classes.

Changes in the budget line

The budget line will shift depending on:

(a) Changes in money income (Py and Px are constant- purchasing power)
(b) Changes in the price of the good- Real income changes (Money income constant)

1. Changes in the price of the good

When there are changes in the price of the good, the budget line is said to shift to rotate. This implies that
the price ration of change in Y / changes in X will change

(i) Assuming income constant, Price of Good x falls and Price of Good y constant. Show the
effect on the budget line.

(ii) Assuming income constant, Price of Good x constant, Price of Good y rises. Show the effect
on the budget line.

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 Lesson 2: Budget line (Part 1) Grade 12- Ms Wassila EL

(iii) Income constant, Price of Good x rises and price of Good y falls. Show the effect on the
budget line

(iv) Income constant, Price of Good x and Good y falls. Show the effect on the budget line

(v) Income constant, Price of Good x and Good y falls by the same percentage

Lesson 2 ends here, lesson 3 will be on budget line part 2: Changes in income