purchase at each price. To draw the curve, we merely replot the data from
part (i) of Figure 6A-7 onto a demand graph, as shown in part (ii) of
Figure 6A-7.
Like part (i), part (ii) has quantity of gasoline on the horizontal axis. By
placing one graph under the other, we can directly transcribe the quantity
determined on the upper graph to the lower one. We first do this for the
600 litres consumed on the innermost budget line. We now note that the
price of gasoline that gives rise to that budget line is $1.50 per litre.
Plotting 600 litres against $1.50 in part (ii) produces the point a, derived
from point A in part (i). This is one point on the consumer’s demand
curve. Next we consider the middle budget line, which occurs when the
price of gasoline is $1.00 per litre. We take the figure of 1200 litres from
point B in part (i) and transfer it to part (ii). We then plot this quantity
against the price of $1.00 to get the point b on the demand curve. Doing
the same thing for point C yields the point c in part (ii): price 50 cents,
quantity 2200 litres.
Repeating the operation for all prices yields the demand curve in part (ii).
Note that the two parts of Figure 6A-7 describe the same behaviour.
Both parts measure the quantity of gasoline on the horizontal axes; the
only difference is that in part (i) the price of gasoline determines the slope
of the budget line, whereas in part (ii) the price of gasoline is plotted
explicitly on the vertical axis.
Income and Substitution Effects