Price effect
Price effect shows the change in demand of the consumer to changes in the price of a commodity, other things remaining the same.
It measures the change in amount demanded of a commodity with change in its price when the price of the other commodity with which it is being combined remains the same.
Price effect was measured by the change in the equilibrium position of a consumer resulting from a change in the price of one of the commodities. If the price falls, the consumer goes over to a higher IC. If the price rises, the consumer moves to a lower IC.
Price-consumption curve (PCC) is the locus of all equilibrium points. It indicates the price effect of a change in the price of X on the consumer's purchases of the 2 goods X and Y, given his income, tastes, preferences and the price of good-Y.
There are 5 types of PCC.
1) The first type is the one where Goods X and Y are SUBSTITUTES.
****draw diagram
In the above figure, the PCC slopes downwards. As the price of X falls, the consumer buys more of X and less of Y. Thus at point S on the PCC, he purchases OB of X and OM of Y instead of OA of X and OL of Y at point R. A downward sloping PCC thus shows that the 2 goods X and Y are SUBSTITUTES for one another. The cross-elasticity of demand between X and Y when they are substitutes are POSITIVE.
2) The second type is the one where Goods X and Y are unrelated goods.
****draw diagram
If the PCC is horizontal, the cross-elasticity of demand between X and Y is ZERO which means that X and Y are UNRELATED GOODS. A fall in the price of X though increasing the purchase of Good X from OA to B and to C has no effect on the demand for Good Y which remains the same as before RA=SB=TC, as shown in the figure above.
3) The Third type of PCC is the on where Goods X and Y are COMPLEMENTARY GOODS.
***draw diagram
If PCC slopes UPWARD, X and Y are COMPLEMENTARY GOODS. the consumer purchases larger quqntities of both the goods at point r,s, and t respectively as shown in figure above.
4) The fourth type of PCC is the one where Good-X is a GIFFEN GOOD.
***draw diagram
In the above figure when PCC is Backward Sloping towards the Y-axis the cross elasticity of demand between X and Y is NEGATIVE. the demand for Good X declines from BS to CT with fall in its price from PQ1 to PQ2 and the demand for Good Y rises from OB to OC. Good X is a Giffen good in this case, where it becomes cheaper the consumer purchases less of it.
5) The fifth type of PCC is the one where X is an INFERIOR GOOD.
***draw diagram
The above figure shows a VERTICAL PCC signifying that X is an Inferior good. A fall in its price from PQ to PQ1 does not lead to rise in its demand which remains constant at OA.
It measures the change in amount demanded of a commodity with change in its price when the price of the other commodity with which it is being combined remains the same.
Price effect was measured by the change in the equilibrium position of a consumer resulting from a change in the price of one of the commodities. If the price falls, the consumer goes over to a higher IC. If the price rises, the consumer moves to a lower IC.
Price-consumption curve (PCC) is the locus of all equilibrium points. It indicates the price effect of a change in the price of X on the consumer's purchases of the 2 goods X and Y, given his income, tastes, preferences and the price of good-Y.
There are 5 types of PCC.
1) The first type is the one where Goods X and Y are SUBSTITUTES.
****draw diagram
In the above figure, the PCC slopes downwards. As the price of X falls, the consumer buys more of X and less of Y. Thus at point S on the PCC, he purchases OB of X and OM of Y instead of OA of X and OL of Y at point R. A downward sloping PCC thus shows that the 2 goods X and Y are SUBSTITUTES for one another. The cross-elasticity of demand between X and Y when they are substitutes are POSITIVE.
2) The second type is the one where Goods X and Y are unrelated goods.
****draw diagram
If the PCC is horizontal, the cross-elasticity of demand between X and Y is ZERO which means that X and Y are UNRELATED GOODS. A fall in the price of X though increasing the purchase of Good X from OA to B and to C has no effect on the demand for Good Y which remains the same as before RA=SB=TC, as shown in the figure above.
3) The Third type of PCC is the on where Goods X and Y are COMPLEMENTARY GOODS.
***draw diagram
If PCC slopes UPWARD, X and Y are COMPLEMENTARY GOODS. the consumer purchases larger quqntities of both the goods at point r,s, and t respectively as shown in figure above.
4) The fourth type of PCC is the one where Good-X is a GIFFEN GOOD.
***draw diagram
In the above figure when PCC is Backward Sloping towards the Y-axis the cross elasticity of demand between X and Y is NEGATIVE. the demand for Good X declines from BS to CT with fall in its price from PQ1 to PQ2 and the demand for Good Y rises from OB to OC. Good X is a Giffen good in this case, where it becomes cheaper the consumer purchases less of it.
5) The fifth type of PCC is the one where X is an INFERIOR GOOD.
***draw diagram
The above figure shows a VERTICAL PCC signifying that X is an Inferior good. A fall in its price from PQ to PQ1 does not lead to rise in its demand which remains constant at OA.
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