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Derivation of Demand Curve From PCC

Demand curve for normal goods slopes downward, showing an inverse relationship between price and quantity demanded. When the price of a normal good decreases, quantity demanded increases due to the combined effects of the substitution effect and income effect. This is illustrated using price consumption curves (PCC), which plot the consumer's equilibrium at different price levels. The PCC is downward sloping, and individual demand curves for a good can be derived by plotting quantity demanded against price using points from the PCC. Therefore, the demand curve captures how lower prices lead to higher consumption of normal goods through consumers substituting to and having more purchasing power for the now-cheaper option.

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3K views1 page

Derivation of Demand Curve From PCC

Demand curve for normal goods slopes downward, showing an inverse relationship between price and quantity demanded. When the price of a normal good decreases, quantity demanded increases due to the combined effects of the substitution effect and income effect. This is illustrated using price consumption curves (PCC), which plot the consumer's equilibrium at different price levels. The PCC is downward sloping, and individual demand curves for a good can be derived by plotting quantity demanded against price using points from the PCC. Therefore, the demand curve captures how lower prices lead to higher consumption of normal goods through consumers substituting to and having more purchasing power for the now-cheaper option.

Uploaded by

Ismith Pokhrel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Derivation of Demand curve (Normal goods);

Demand curve shows an inverse relationship between price of a commodity and quantity demand
of that commodity keeping other factors like taste and preference, income, climate, population,
etc. constant (ceteris paribus). This is a case of normal goods. Normal goods shows inverse
relation between price and quantity demand so its demand curve is downward sloping. With the
help of price consumption curve (PCC) we can derive individual demand curve. When price of a
normal good falls there is increase in quantity demand of that goods and vice versa. Demand
curve for normal goods can be derived from PCC which is explained below.

In upper panel of a figure, E1 is initial equilibrium of a consumer at budget line AB and


indifference curve IC1 where price of a commodity is P1 and consumer purchase or demands
OX1 quantity of X. Now price of X falls to p1 consumer real money income increases (M/P) or
his purchasing power increases causing budget line to swing from AB to AB1 and equilibrium
moves from E1 to E2 at indifference curve IC2 where X2 quantity of X is consumed. Similarly,
price of X falls to P3 consumer moves to E3 at IC3 where he buys OX3 quantity of X. joining
E1, E2 and E3 we get PCC which is downward sloping

In the lower panel, X axis represents quantity demand of X and Y axis represents price of X.
when price is P1, quantity demand is OX1. When price decreases to P2 and P3 quantity demand
increases to OX2 and OX3. Joining these points we get downward sloping demand curve Dx.
This downward sloping demand curve is derived from PCC of upper panel. Since PCC
represents price effect which is result of substitution effect and income effect. Therefore, it can
be concluded that inverse relation between price and quantity demand for normal good is due to
income effect and substitution effect.

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