Price Consumption Curve (PCC)

The ordinary demand curve of a good can be derived by using IC technique particularly using the price consumption curved (PCC). PCC may be defined as the locus of different equilibrium points showing optimal consumption when the slope of the budget line changes due to change in price of a good.

This assumes that price of other good and money income of the consumer is constant. Since demand curve is the locus of price and quantity combinations of a good, PCC can be used to derive the demand curve as shown in the following diagram.

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As     Px 4,, qd x t es, ceteris paribus
Here P < Px
X2 > Xi

Initially the equilibrium of the consumer is given at point E, where the given budget line AB is tangent to the indifference curve IC,. Now suppositions to P’z this implies a rightward swing of the budget line to AB’, and new equilibrium at E2. At this new equilibrium, after the Tall in the price of X, ceteris paribus, the quantity demanded of X increases from X, to X2. By joining the two equilibrium points E, and E2 we get PCC of X.

In the lower diagram, we take price of X on the vertical axis and quantity demanded of X on the horizontal axis. By plotting the price and corresponding quantity demand of good X by the consumer, we get the demand’ curve of good X. This simply shows that as the Px falls to P ‘z,quantity demanded of X increases from X, to X2 we join point cand to get the downward sloping demand curve of good X.

Tags: Ba Economics

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