In this article we will discuss about the shift and rotation of the budget line, explained with the help of a suitable diagram.

In the indifference curve theory, it is assumed that the consumer purchases and consumes only two goods (here X and Y). If the prices of goods X and Y, and the money income of the consumer is given, then the equation of the budget line of the consumer would be

M̅ = px.x + py.y                               [eqn.(6.15)]

The slope of the budget line (6.15) is –px/py = negative, and x-and y-intercept of the line are M/px and M/py, respectively.

Now suppose, initially the values of M, px and py are such that the budget line of the consumer has been obtained to be a line like L1M1 in Fig. 6.7.

If now the money income (M) of the consumer rises, px and py remaining unchanged, then, the slope (-px/py) of his budget line remaining constant, the intercepts of the line (M/px and M/py) would increase.

As a result, the budget line would have a rightward parallel shift from L1M1 to a new position like L2M2. Conversely, if the money income of the consumer decreases, prices remaining constant, the budget line would have a parallel shift to the left. This rightward or leftward parallel shift of the budget line is known as “shift” of the budget line.