Cambridge International as and a level Economics Ebook

Scarcity and choice: 
A budget line represents the extent 
of a consumer’s income; an indiff erence curve indicates 
the possible choices that are available. When combined, 
they show how the consumer can maximise satisfaction.
KEY CONCEPT LINK
Eff ect of a change in income on 
consumer choice
Th
e budget line constraint and the indiff erence curve 
can now be used together to show the eff ect of a change 
in income on the consumption of two goods. Th
is is 
indicated in 
Figure 7.3
. A consumer’s choice is optimal at 
the point where the budget line touches or is at a tangent 
to the highest indiff erence curve. So, 
E
1
will give the 
consumer the maximum combined consumption of goods 
A
and 
B
given the budget constraint shown by the budget 
line 
B
1
.
If income increases then this will allow the consumer 
to choose a better combination of goods 
A
and 
B
. Th
is will 
usually be more of each good. So, if the budget constraint 
rises to 
B
2
, then the consumer will increase consumption 
of good 
A
and also of good 
B
, albeit to a lesser extent. 
E
2
is the new optimal position, where more of both goods 
Figure 7.2 
An indiff erence curve
Quantity of good A
Quantity of good B
0
I
2
I
1
x
y
z
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Cambridge International A Level Economics

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are being consumed. Th
e change in position from 
E
1
to 
E
2
is what occurs when both goods are normal goods. If the 
increase in income or budget constraint results in less of 
one good being consumed then this is an inferior
 
good.
When there is a fall in consumer income, the budget 
line shift s to the left in a parallel way. Th
is indicates 
that both goods are normal and that less of each will be 
consumed.