Price-consumption curve connects points of equal utility on budget lines formed by changing prices; income-consumption curve connects points of equal utility on budget lines formed by changing income. Feb 18, 2013 The price consumption curve is the curve that results from connecting tangents of indifference curves and budget lines (optimal bundles) when income and the price of good y are fixed, and the price of x changes. When good x and good y are complements, as real income increases, you buy more of both goods, making the PCC positively sloping.
ADVERTISEMENTS:Relationship between Price Consumption Curve and Price Elasticity of Demand!It is also possible to know with indifference curve analysis whether price elasticity is more than one, equal to one or less than one. It is from the slope of price consumption curve that we are able to judge the price elasticity of demand.Let us take Fig. 13.19 where on the Y-axis money income is measured and on X-axis the quantity of a commodity X. It is assumed that the consumer has OA amount of money to spend. Each of the indifference curves drawn between the two axes will show the various combinations of money and good X among which consumer is indifferent.
To begin with, AB is the price line. ADVERTISEMENTS:The slope of the price line AB, i.e., OA/OB will give the price of good X.
![Price Consumption Curve Price Consumption Curve](http://cdn.economicsdiscussion.net/wp-content/uploads/2017/05/clip_image063_thumb2_thumb.jpg)
At this price (i.e., with price line AB) the consumer is in equilibrium at point Q 1 on indifference curve IC 1 and is buying OX 1 of good X. Thus, in this equilibrium position, he is having combination of OX 1 of good X and OY 1 of money. It means that he has spent AY 1 of money on the good X and has obtained OX 1 of its quantity. Let price of good X falls, money income of the consumer remaining the same, so that we get a new price line AC. The new price of good X will be given by the slope of the new price line AC, i.e., OA/OC.With this lower price or with price line AC, the consumer is in equilibrium at Q 2 on indifference curve IC 2. At this new equilibrium position Q 2 the consumer is getting OX 2 of good X and amount OY 2 of money is let with him. It means that at the lower price of good X he has spent AY 2 amount of money on it which is greater than the amount AY 1 of money which he spent at the original price.Thus, with the fall in price, his expenditure on the good X has increased.
Similarly, when the price of good X falls further so that AD is now the relevant price line, consumer is in equilibrium at Q 3 where he is spending AY 3 amount of money and is having OX 3 quantity of the good X. Money expenditure AY 3 is greater than AY 2.It is thus clear that in the present case when the price consumption curve is sloping downward (i.e., PCC has a negative slope), with the reduction in price of the good X the consumer’s money outlay on the good X increases.
13.19 indifference map depicting preferences of the consumer is such that we get a downward sloping consumption curve which means, as explained above, that with the fall in the price of good X, consumer’s expenditure on it rises.We know that when consumer’s money expenditure on a good rises with the fall in price of the good, the demand for the good is elastic, i.e., elasticity of demand is more than one. We thus conclude that when price consumption curve for good slopes downward, price elasticity of demand is more than one, that is, demand is elastic.In Fig. 13.20, we have depicted such an indifference-preference map of the consumer that gives us a price consumption curve PCC which is a horizontal straight line, parallel to the X-axis (that is, price consumption curve has a zero slope).In this case, with the fall in the price of the good, though quantity purchased of good X rises first from OX 1 to OX 2 and then from OX 2 to OX 3, but consumer’s expenditure on the good remains constant at AY 1. We know that when consumer’s expenditure on the good remains constant whatever the price, price elasticity of demand is equal to one. ADVERTISEMENTS:Thus, the price consumption curve which is a horizontal straight line will show unit elasticity of demand.
We thus conclude that when indifference map is such that it gives a price consumption curve of the shape of a horizontal straight line, the price elasticity of demand for the good X is equal to unity.In Fig. 13.21, indifference or preference map of the consumer is such that it yields an upward- sloping price consumption curve PCC (that is, the slope of the price consumption curve is positive). It will be seen that in this case consumer’s outlay on the good decreases with the fall in the price of the good.
When the price falls and the price line shifts from AB to AC, the quantity demanded of the good rises from OX 1 to OX 2 but consumer’s expenditure on the good X falls from AY 1 to AY 3.Likewise, when price falls further and as a result price line shifts from AC to AD, though quantity demanded of the good X rises from OX 2, to OX 3, consumer’s expenditure on the good X fall s from AY 2 to AY 3. Thus upward sloping price consumption curve means a decline in consumer’s expenditure as the price of the good X falls.
ADVERTISEMENTS:This article will guide you about how to derive demand curve from price-consumption curve. Introduction:The price-consumption curve (PCC) indicates the various amounts of a commodity bought by a consumer when its price changes. The Marshallian demand curve also shows the different amounts of a good demanded by the consumer at various prices, other things remaining the same.Given the consumer’s money income and his indifference map, it is possible to draw his demand curve for any commodity from the PCC. ADVERTISEMENTS:The conventional demand curve is easy to draw from a given price demand schedule for a commodity, whereas the drawing of a demand curve from the PCC is somewhat complicated.
But the latter methods has an edge over the former. It arrives at the same results without making the dubious assumptions of measurability of utility and constant marginal utility of money.The derivation of demand curve from the PCC also explains the income and substitution effects of a given fall or rise in the price of a good which the Marshallian demand curve fails to explain.
Thus the ordinal technique of deriving a demand curve is better than the Marshallian method. Assumptions:This analysis assumes that:(a) The money to be spent by consumer is given and constant. ADVERTISEMENTS:He buys OA, OB and OC unit of X respectively at these points on the PCC curve. If the total money income of the consumer is divided by the number of goods to be bought with it, we get per unit price of the good. For OA unit of X, he pays OP/OQ price; for OB units, OP/OQ 1 price; and for OC units, OP/OQ 2.This is, in fact, the consumer’s price-demand schedule for good X which is shown in Table 5.The price-demand schedule of the consumer for good X shows that given his money income OP (Rs.10) when he spends his income in buying OQ quantity (2 units), it means that the price of X is OP/OQ (Rs.5) as per budget line PQ at which the consumer buys OA (one unit) of good X.
This is shown by point R on the f curve. When the price of good A” as determined by the budget line PQ, is OP/OQ, (Rs. 2), the price-consumption curve shows that he buys OB (4 units) of X.
This is shown by point S on the curve I 2. When the price of good X is determined as OP/OQ 2 (=Re 1) on the budget line PQ 2 and the curve L at point T, the consumer buys OC (7 units) of X. Point R, S and T on the PCC curve show price-quantity relationships for good X.These points are plotted on the lower diagram in figure 38.
The price of X is taken on the vertical axis and quantity demanded on the horizontal axis. To draw the demand curve from the PCC, draw a perpendicular on the lower figure from point R in the upper portion of Figure 38 which should pass through point A. Then draw a line for point P 1 (=5) on the price axis (lower figure) which should cut the perpendicular at point F. ADVERTISEMENTS:There will be other consumers demanding it at a lower price to which it may not appear an inferior good. For the market as a whole, a good is not likely to be inferior at all, there being always a sufficient number of buyers over the same price range. Hence the market demand curve will always slope downward to the right. Positively Sloping Demand Curve:The downward slope of the demand curve from left to right is for ordinary goods, as is shown in the lower portion of Figure 40.
But if X happens to be a Giffen good, the demand curve slopes upwards to the right. It is positively sloping. X being a Giffen good when its price falls, the real income of the consumer increases. As a result, he spends his income on superior goods and buys less quantity of the Giffen good X.The demand curve for a Giffen good has been drawn from the PCC in Figure 40. In the upper portion of Figure 40, the backward sloping PCC curve for the Giffen good X is drawn.