Economics, 3rd Edition

A Change in Income

Over time people’s incomes change – sometimes they earn more but sometimes they earn less such 

as if they are made redundant, for example. If our consumer gets a pay rise and now earns 

€1,500 per 

month, he can now afford to buy more of both pizza and cola assuming the prices of these two goods do 

not change. The effect on the budget constraint is to cause it to shift to the right, as shown in Figure 5.2. 

If the consumer devoted all of his income to buying cola he could now buy 750 litres of cola compared 

to 500 litres when his income was 

€1,000 per month. If the consumer devoted all his income to buying 

pizza he could not afford to buy 150 pizzas a month compared to 100 when his income was 

€1,000 per 

month. Any point along the new budget constraint shows that the consumer can now buy more of both 

goods. If the consumer’s income was to fall to 

€500 per month because he lost his job, for example, then 

the budget constraint would shift to the left, indicating that the consumer could now afford to buy less of 

both goods with his income.

Notice, however, that whilst the budget constraint in Figure 5.2 has shifted to the right, the slope is still 

the same. This is because the prices of the two goods have not changed. What happens to the budget 

constraint if one or more of the prices of cola and pizza changes? This is what we look at next.

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106  PART 2  SUPPLY AND DEMAND: HOW MARKETS WORK