The optimal consumption combination is e 1 on indifference curve U 1. When price of X P x) falls, to say OP 1, the budget constraint shift to AB 1. e is the initial optimal consumption combination on indifference curve U. Suppose the initial price of good X (P x)is OP.
The upper panel of Figure.2 shows price effect where good X is an inferior good. Figure.2 shows derivation of the consumer's demand curve from the price consumption curve where good X is an inferior good.įIGURE.2 Derivation of the Demand Curve: Inferior Goods In this section we are going to derive the consumer's demand curve from the price consumption curve in the case of inferior goods. The demand curve is downward sloping showing inverse relationship between price and quantity demanded as good X is a normal good.ĭerivation of the Consumer's Demand Curve: Giffen Goods DD 1 is the demand curve obtained by joining points a and b. At a lower price OP 1, quantity demanded increases to OX 1. At initial price OP, quantity demanded of good X is OX. The lower panel of Figure.1 shows this price and corresponding quantity demanded of good X as shown in Chart.1. The Price Consumption Curve (PCC) is rising upwards.Ĭhart.1 shows the demand relationship derived form the price consumption curve. The consumer now increases consumption of good X from OX to OX 1 units. When price of X (P x)falls, to say OP 1, the budget constraint shift to AB 1. Suppose the initial price of good X (P x) is OP. The upper panel of Figure.1 shows price effect where good X is a normal good. Figure.1 shows derivation of the consumer's demand curve from the price consumption curve where good X is a normal good.įIGURE.1 Derivation of the Demand Curve: Normal Goods In this section we are going to derive the consumer's demand curve from the price consumption curve. It is the demand curve that shows relationship between price of a good and its quantity demanded. However, it does not directly show the relationship between the price of a good and its corresponding quantity demanded. We have already seen how the price consumption curve traces the effect of a change in price of a good on its quantity demanded.
Derivation of the Consumer's Demand Curve: Normal Goods
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