Economics, 3rd Edition

How Changes in Prices Affect the Consumer’s Choices

Suppose that the price of cola falls from 

€2 to €1 a litre. We have seen how a change in the price of any 

good causes the budget constraint to pivot. With his available income of 

€1,000 the consumer can now 

An Increase in Income

When the consumer’s income rises, the 

budget constraint shifts out. If both goods 

are normal goods, the consumer responds 

to the increase in income by buying more of 

both of them. Here the consumer buys more 

pizza and more cola.

A I

i I

FIGURE 5.12

0

Quantity

of cola

Quantity

of pizza

I

1

I

2

3. ... and cola

    consumption.

New optimum

Initial

optimum

New budget constraint

Initial

budget

constraint

2. ... raising pizza consumption ...

1. An increase in income shifts the

   budget constraint outward ...