What is indicated by a downward shift in a consumer's budget line?

A downward shift in a consumer's budget line indicates that the consumer's purchasing power has decreased. This typically occurs due to a decrease in income, allowing for fewer combinations of goods and services to be purchased at existing prices. When a consumer's income decreases, the maximum amount of goods they can afford decreases, which translates into a downward shift in their budget constraint.

In this scenario, the consumer's ability to buy goods is restricted to a smaller set of combinations, which visually appears as the budget line moving downwards on a graph where one good is plotted against another. This shift means that even if prices remain constant, the consumer can now afford less of each good compared to before.

On the other hand, an increase in the price of one good would typically change the slope of the budget line rather than shift it downward uniformly. A decrease in the price of all goods would shift the budget line outward, allowing for more purchasing power. Additionally, an increase in consumer preferences does not directly affect the budget line itself, as it pertains more to the consumer's utility rather than their financial constraints. Thus, the correct interpretation of a downward shift in a budget line aligns with a decrease in income.