Budget Line:  

The budget line is an important component when analyzing consumer behavior. The budget line illustrates all the possible combinations of two goods that can be purchased at given prices and for a given consumer budget. Remember, that the amount of a good that a person can buy will depend upon their income and the price of the good.

Budget constraint with given income U and given prices Px and Py which are the prices of Good X and good Y respectively, and Qx is the quantity of Good X and Qy is the quantity of

Good Y is given as:

                             U = PxQx + PyQy

Consumer equilibrium occurs when utility is maximized (in terms of goods and services consumed) subject to a budget constraint. If the degree of satisfaction of all wants and desires can be measured on a single "utility"scale, the household will choose the bundle of goods that maximizes utility. With a limited budget the consumer can only consume a limited combination of x and y (the maximum combinations are on the actual budget line).

If consumer income increases then the consumer will be able to purchase higher combinations of goods. Hence an increase in consumer income will result in a shift in the budget line. Note that the prices of the two goods have remained the same; therefore, the increase in income will result in a parallel shift in the budget line

If consumer income decreases then there would be a corresponding parallel shift to the left to represent a fall in the potential combinations of the two goods that can be purchased.

If income is held constant, and the price of one of the goods changes then the slope of the curve will change. In other words, the curve will pivot.