Page 61 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes 4.5.2 PCC and Demand Curve

The individual consumer demand curve for the commodity X can be derived from the price
consumption curve. For example, when the price of X is given by the slope of ML, the amount of
1
11
1
X demanded is OX ; when the price of X is given by slope ML , OX amount of X is purchased;
11
and OX is purchased at a price of X denoted by the slope of ML . Thus the price consumption
relations when taken out and plotted separately in Figure 4.7 gives the demand curve, D.
Figure 4.7

4.5.3 Income of the Consumer

When the price of the commodity X changes, the real income position of the consumer also
changes and this has a considerable effect on the consumer's demand.
The traditional marginal utility analysis ignored this income-effect assumption of constant
marginal utility of money spent. The indifference analysis considers this income effect, because
it is an important determinant of demand.
Figure 4.8 shows three parallel budget lines corresponding to three different levels of the
consumer's income which he spends on goods X and Y, the points E , E , and E being the three
1 2 3
equilibrium points. The curve joining such equilibrium points is known as the Income
Consumption Curve (ICC). The slope of the budget line depends on the price ratio and hence
remains constant.
Figure 4.8

56 LOVELY PROFESSIONAL UNIVERSITY