Now let's see how a change in income can affect the budget constraint. So we can imagine if we make more or less money, it's going to affect the budget constraint line. So if our income increases, it's going to shift our budget constraint outward. Okay? And if it decreases, it's going to shift inward and by that I mean closer to the origin or further, right? Outward would be further away from the origin, inward would be closer to the origin. Okay? So let's see an example here where party boy Paul from our previous example, he's going to spend all of his income, which is now $24 so it increased. Previously, we had an income of $18 and now we're going to say that we have 24 instead. Everything else is going to hold constant. Vodka still sells for 6, beer still sells for 3, but he has $24 to spend now. Alright?

So the first thing I want to do real quick is I'm going to go ahead and I'm going to put our original budget constraint. If you remember, when he had $18 his budget constraint looks something like this from the previous page. 3 and 6, so he had a budget constraint something like that. Okay, this was when income so this was income whoops, income of $18 right? So that was the previous budget constraint. Let's see what happens to it now with more income. So we're going to still have quantity of vodka up here, quantity of beer on this axis and we already know our maximum quantity formula, but I wanted to reiterate it here so you guys remember.

Our maximum quantity formula that is going to be our income divided by our price, right? So let's say, what is going to be our maximum quantity of vodka? Well, the maximum quantity, we're going to take our income of 24 divided by our price of $6 for vodka. So 246, that is going to give us, not in dollars in quantity, we could buy 4 vodkas. Right? We could buy 4 vodkas. How about beer? So beer, we still have $24 but the price is 3 for beer, so we can buy 8 beers, right? With $24 So notice we were able to buy more of each good, right? Before we could only afford up to 3 vodkas, now we can afford up to 4, and before we can only afford up to 6 beers and now we can afford 8.

So let's go ahead and graph this one in blue. I'm going to graph this one in blue. So we're going to mark our axes here. We have our 4 vodkas with 0 beer and we have our 8 beers with 0 vodka, right? This is 8 over here. So what happens? We just have to connect these lines, right? To connect these points and make a new budget constraint and notice what has happened. It has shifted outward, right? It shifted further from the origin because income increased, right? And that's what we set up here. When income increases, it's going to shift outward and that's what we see here. This is his new income of 24. We have this shift outward and it shifts on both axes, right? We can buy more vodka and also more beer. We have more availability, more money to buy both products. Cool? Alright. So that's what happens when we have a change in income. Let's go ahead and pause here and move on to the next video.