[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

450
ALL OTHER GOODS ($)
300
G
G'
F
F'
20 30
CDs
Figure 5.3
THE EFFECT ON CONSUMPTION WHEN INCOME CHANGES
If the amount Gary and Fran have to spend on CDs and other good rises from $300 to
$450, the budget line shifts to the right. Because the price of CDs is still $15, the slope
of the budget line does not change. The points Gary and Fran choose on the new
budget line are G' and F'. With additional income, they both choose to buy more CDs
and to spend more on other goods.
WHAT HAPPENS TO CONSUMPTION WHEN
INCOME CHANGES?
When an individual’s income increases, he has more to spend on consumption. Figure
5.3 shows the effect on the budget constraint of an increase in income. The original
budget line is the same as that used in Figure 5.2: Gary and Fran have $300 to spend
on CDs or other goods. If the total amount they have to spend increases to $450, the
new budget line is farther to the right. Now, Gary and Fran could purchase 30 CDs
if they spend the entire $450 on CDs, or they could spend it all on other goods.
Because the price of a CD has not changed, the slope of the new budget line is the same
as that of the old budget line. Changes in income shift the budget line but do not
alter its slope.
The new choices of Gary and Fran are at points G′ and F′. Because they have
more to spend, Gary and Fran each decide to purchase more CDs and more of other
goods. Their behavior is typical; when people’s incomes increase, they will buy a
little more of many goods, although the consumption of some goods will increase
more than that of others, and different individuals will spend their extra income in
different ways.
THE BASIC PROBLEM OF CONSUMER CHOICE ∂ 105