Economics, 3rd Edition

A Change in the Price of Both Cola and Pizza

The effect of a change in the price of both goods on the budget constraint 

depends on the relative change in the prices of the two. In this example the 

price of cola has risen and the price of pizza has fallen causing the budget 

constraint to change shape. The slope is now 0.5.

A

Ch

i

t

h P

i

FIGURE 5.5

Quantity

of cola

Quantity

of pizza

500

250

100

125

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108  PART 2  SUPPLY AND DEMAND: HOW MARKETS WORK

PREFERENCES: WHAT THE CONSUMER WANTS

The budget constraint shows what combination of goods the consumer can afford given his income 

and the prices of the goods. The consumer’s choices also depend on his preferences. We will continue 

our analysis using cola and pizza as the consumer’s 

choice set

 – the set of alternatives available to the 

consumer.

choice set 

the set of alternatives available to the consumer