The consumer now increases consumption of good X from OX to OX 1 units. 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.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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