9781118041581

4 units of Y) occur at point B. Here, MRS PX/PY2. No change in pur-

chases could increase the consumer’s welfare.

Demand Curves

The demand curve graphs the relationship between a good’s price and the

quantity demanded, holding all other factors constant. Consider the con-

sumer’s purchase of good X as its price is varied (holding income and the price

of Y constant). What if the price falls from $4 per unit to $2 per unit to $1 per

unit? Figure 3A.4 shows the effect of these price changes on the consumer’s

budget line. As the price falls from $4 to $2, the budget line flattens and piv-

ots around its vertical intercept. (Note that, with the price of Y unchanged, the

maximum amount of Y the consumer can purchase remains the same.) The

figure shows the new budget lines and new points of optimal consumption at

the lower prices.

As one would expect, reduction in price brings forth greater purchases

of good X and increases the consumer’s welfare (i.e., she moves to higher

126 Appendix to Chapter 3 Consumer Preferences and Demand

FIGURE 3A.4

The Price-

Consumption Curve

The price-consumption

curve shows that the

consumer’s demand for

X increases as its price

falls.

Quantity of Good Y

Quantity of Good X

Px = $4 Px = $2

Px = $1

Price-consumption

curve

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