Final answer:
A decrease in the price of a good rotates the budget constraint outward about the y-intercept, allowing consumers to purchase more of that good for the same income, resulting in higher utility and changes in the quantity demanded of the good.
Step-by-step explanation:
When the price of a good, represented by x, decreases, this affects an individual's budget constraint in a specific way. It causes a rotation outward of the budget constraint around the y-intercept on a graph where good x is on the horizontal axis, and another good is on the vertical axis. The result is that a consumer can now purchase more of good x for the same level of income, illustrating an essential principle of demand curves: a connection between lower prices and increased quantity demanded. All else being equal, also known as ceteris paribus, a decrease in the price of x means a higher quantity of x will be demanded, as the budget constraint now touches a higher indifference curve, suggesting a higher level of utility.
For example, if the price of books falls while the price of doughnuts remains constant, consumers can afford to buy more books than before without increasing their spending on doughnuts. Depending on their preferences, they might buy many more books and slightly more or even fewer doughnuts, altering the quantities consumed based on their pursuit of the highest utility possible with their budget. The exact response in consumption of each good depends on the individual’s preference, which is graphically represented by the shape and position of their indifference curves.