Microeconomics · Interactive
Consumer choice: budget line and indifference curves
When a price falls, income rises or a taste shifts, the budget line moves and the chosen bundle slides to a new tangency. Freeze the old bundle and watch the move split cleanly into a substitution effect and an income effect.
x* 25.0 · y* 12.5
Budget lineIndifference curveChosen bundle
The maths, with your numbers
Budget constraintPx·x + Py·y = M2x + 4y = 100
Marshallian demand for Xx* = αM / Px25.0
Marshallian demand for Yy* = (1−α)M / Py12.5
Utility at the optimumU* = x*αy*1−α17.7
Reading the diagram
What moves, and why
The budget line is what you can afford
Its slope is the price ratio, −Px/Py; where it crosses each axis is income divided by that good's price. A price change rotates it; an income change shifts it out, parallel to itself.
The indifference curve is what you want
You choose the bundle where the highest reachable curve just touches the budget line. For Cobb-Douglas tastes, α (the share of income spent on x) pins down exactly where on the line that tangency lands, whatever the prices or income happen to be.
Splitting the move
After a price change, freeze the old bundle: the diagram marks the compensated (Hicksian) bundle on the old indifference curve, which takes just enough income to stay equally well off at the new price. The move to there is the pure substitution effect; the rest, sliding onto the new curve, is the income effect.
Try it on real questions
From CUET-PG and JNU MA Economics entrance
Five questions on exactly this: reading a budget line, finding the tangency, and splitting a price or income change.
These are questions from the TestStop bank. A free account answers 10 a day, each with its worked solution; All-Access opens every set with no daily limit.
Read next
All resources →MicroeconomicsIncome and substitution effects: Hicks and SlutskyTen chapters from the basic idea to the Slutsky equation, with a step-by-step decomposition lab and normal, inferior and Giffen goods on live diagrams.MicroeconomicsConsumer theory: preferences, budget, demand and the Slutsky equationA module in seventeen lessons: preferences, utility and the MRS, the budget, utility maximisation, corners, taxes and subsidies, labour supply and saving, demand, elasticity and Engel curves, the Slutsky equation, revealed preference, duality, compensating variation, the properties of demand, and a lesson of Delhi School problems. With labs, a Workbench, worked questions and graded past papers.MicroeconomicsElasticity and surplus, worked outSlide a price along a demand curve and watch point elasticity and consumer surplus update, with the working shown line by line.