5.22 : Deriving the Demand Curve from Price Consumption Curve

The price consumption curve shows how the optimal bundle changes with the change in prices of one good. This relation between price changes and the quantity purchased helps derive the demand curve of that product.

Consider the graph that depicts John's equilibrium on the indifference curve, IC1, at point E, with seven units of clothing and six meals out, when the price of clothing is twenty dollars per unit and the price of meals out is ten dollars per unit.

This point is plotted on a separate graph. The number of clothing units is plotted on the x-axis, and the price on the y-axis.

When the price of clothing falls to ten dollars per unit, he chooses to buy fifteen units of clothing, as shown at point F. This change is plotted on the second graph.

When the price falls to eight dollars, he chooses to buy twenty units, as shown in point G with a corresponding point on the second graph.

John's demand curve for clothing is derived by joining all such points.

The demand curve shows how consumers make choices in response to changing prices.