44 - 20:45 3.2 limitedincomes

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F C P F P C I + = 20:45 3.2 budget constraints     Constraints that consumers face as a result of  limited incomes. budget line     All combinations of goods for which the total amount of  money spent is equal to income. A budget line describes the combinations of goods that can be purchased given  the consumer’s income and the prices of the goods. Income Changes   A change in income (with prices unchanged) causes the  budget line to shift parallel to the original line ( L 1 ). When the income of $80 (on  L 1 ) is increased to $160, the budget line shifts  outward to  L 2 . If the income falls to $40, the line shifts inward to  L 3 . Price Changes   A change in the price of one good (with income unchanged)  causes the budget line to rotate about one intercept. When the price of food falls from $1.00 to $0.50, the budget line rotates outward  from  L 1  to  L 2 .
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