The new equilibrium of the consumer at point E 2 in Fig. The new budget line is tangent to a higher indifference curve IC 2 at point E 2. Suppose the price of commodity ‘X’ falls, the budget line shifts to the right from AB 1 to AB 2. 5.29, initial consumer equilibrium is shown at point E 1, where the original budget line AB touches the highest possible indifference curve IC. Therefore, it can be said that the price consumption curve starts from that point on the axis (‘X’ or ‘Y’), whose price remains unaffected and moves to those points, where price of commodity changes. In this case, the consumer is forced to buy commodity ‘Y’ altogether and decides not to buy commodity ‘X’ at such a high price. In limiting case, when the price of commodity ‘X’ rises to infinity, the budget line coincides with the Y-axis. On the other hand, when the price of commodity on the horizontal axis rises, the budget line will rotate about a pivot point on the Y-axis clock wise (to the left). For fall in the price of commodity ‘X’, the budget line swings to the right and becomes flatter and flatter (as P x/P y falls). In other words, the purchasing power of the consumer in terms of commodity ‘Y’ remains unchanged, equal to OA. With every change in the price of commodity ‘X’, the budget line changes its slope, but its starting point on the Y-axis remains the same, as the price of commodity ‘Y’ is assumed to be constant. The point of equilibrium corresponding to each price change will be given by the point at which the corresponding budget line touches the highest possible indifference curve. However, if the price of only one commodity (say, ‘X’) changes, with everything else including consumer’s income remaining unchanged, the consumer equilibrium will shift to a new budget line. The consumer purchases such a combination of commodities on the budget line from which there is no tendency for change or rearrangement.
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