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Unit 6: Consumer Behaviour: Ordinal Approach
between X and Y, and the slope of budget line indicates the ratio of price of X to that of Y. Thus Notes
the principle of consumer’s equilibrium works out; the marginal rate of substitution between X
and Y must be proportional to the ratio of price of X to that of Y.
P
MRS = x
xy
P y
Figure 6.3
Changes in Price
According to the price consumption curve, if the price of X falls, the new budget or price line
becomes M-L , as more of X can be brought out of the given budget and thus C becomes the new
1
1
equilibrium point. If the price of X falls again, the price of Y and budget remaining same, the new
equilibrium point shifts to C . The line connecting such successive equilibrium points at C, C
1
11
and C is called PCC or price consumption curve.
11
Figure 6.4
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