... The two curves combine and the point where the indifference curve is tangent to the budget line depicts the optimal choice between the goods (point A below). At this point the consumer is maximising his utility, whilst not over or under spending in relation to his budget. By using comparative statics and ceteris paribus we can see what effect a change in price will have upon the optimal choice, and thus upon demand. So, if we hold constant the level of income and the price of good 2, as well as assuming that tastes and preferences have not changed, then we can clearly see the effect of a price rise. By raising the price of good 1 we flatten the budget line. As we can see from the diagram below the price rise has pivoted the budget line to the left. Consequently a new optimal choice point is shown. We can ...

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