Changes In The Budget Set

What are Changes in the Budget Set?

A budget set or a set of opportunities incorporates all feasible utilisation bundles that someone can manage provided the cost of commodities and the person’s earning degree.

The budget set is always bounded above by the budget line. Graphically, all the utilisation bundles that lie inside the budget restriction and on the budget restriction form the budget set or set of opportunities.

The set of obtainable bundles relies upon the cost of two commodities and the earnings of the customer. When the cost of either of the commodities or the customer’s earnings changes, the set of obtainable bundles is also probable to change.

Suppose that the customer’s earnings change from N to N′, the prices of the two commodities remain constant. With the new earnings, the customer manages to purchase all the bundles (x1, x2) such as p1 x1 + p2 x2 ≤ N′.

Now, the equation of the budget line is as follows:

p1 x1 + p2 x2 = N′

The given equation can also be written as follows:

x2 = N1/p2 – p1/p2 x1

Note that the slope of the new budget line is the same as the slope of the budget line prior to the change in the customer’s earnings.

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