Microeconomics for business Free Essay Example

The consumer’s income has increased by 10%, thus increasing their income from 100 to  110; this has increased their disposable income and spending power. The consumers spending budget is represented by the budget line (or budget constraint). It gives the budget constraint for the individual’s current level of income. The consumer’s preference is represented by an indifference curve. Indifference curves represent all the combinations of the market goods that provide the consumer with the same level of satisfaction.

The indifference curves are placed along the budget constraint, depending on the consumer’s preference of goods, and how much the consumer is willing to substitute more of one good for another.

Due to the consumer’s income having gone up, the budget line and indifference curve shifts outwards. Being that they are normal goods, it simply means that they buy more of the same good because they have more income. When income increases people can simply afford more of X and Y, the slope shifts outwards and remains unchanged.

There are many different points on the budget constraint. The budget constraint shows the maximum or minimum amount of goods the consumer can purchase with their given income. At the different points on the budget constraint, the consumer is able to purchase different degrees of utility. Within the line you are within your income and above the line is not possible, the expenditure is not within your reach. If all the previous income were spent on fish you would be able to purchase 20 fish, and if all previous income were spent on beans you would be able to buy 33 beans.

However the income was increased, therefore the spending power, so the consumer was instead able to purchase up to 22 fish or 36 beans. Because the budget line has shifted outwards to accommodate the increase, it means that the equilibrium has also increased from 16. 5 beans and 10 fish, to 18 beans and 11 fish. Due to the fact that 16. 5 is not a whole number, it would be rounded down to 16. It can not be rounded up to 17 as that would go beyond the expected income.

The indifference curve also shifts outwards on the new budget line, and the difference curve is situated at the equilibrium, assuming that the consumer purchases equal shares of both the beans and fish. If the price of fish went up by 25%, the price of fish would go from  5 to 6. 25. With an income of 100, the consumer would be able to purchase 16 fish. The amount of beans able to be purchased will remain the same, and 33 beans could be purchased with i?? 100. When the price of good increases, the consumer’s purchasing power will decrease and hence attainable utility will fall.

The consumer’s choice of consumption will have an effective change. This can be displayed diagrammatically where the consumer’s budget line will change and pivot to accommodate for the price change. The indifference curve would also shift downwards, along the new equilibrium on the new budget constraint. A change in a goods price will rotate the budget line. If there is a price increase, the budget line will rotate inward, if there is a price decrease, the budget line will rotate outwards, along with the indifference curve.

In this case the budget line rotates inwards along the Y axis where the price change has increased from 5 to 6. 25, where the consumer’s attainable utility has fallen from being able to buy 20 fish to 16 fish. This means that the equilibrium level has also changed and fallen with purchasing power, this can be displayed from the new indifference curve in bold. The equilibrium level for beans is still the same at 16. 5; however the equilibrium for fish has dropped from 10 to 8.

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