Price effect is the impact of change in the price of one goods on its quantity purchased, when price of the other goods and income of the consumers remains unchanged. Thus, when price of X falls while that of Y remains unaltered, the budget line changes along the X – axis and the slope of the budget line decreases. Now equilibrium points are established that show increased purchase of good X. the line joining the successive equilibrium point is called price consumption curve or PCC. The PCC is positively sloped in case of normal goods, showing a larger quantity purchased with a fall in price and vice versa.
When demand for a goods X is more elastic, the PCC curve will be downward sloping. It will be upward sloping when the demand is less elastic. It will be a horizontal line parallel to X – axis when price elasticity of demand is unity. In case of Giffen goods the PCC is backward bending towards Y – axis if X is a Giffen good, and towards X – axis if Y is a Giffen good.SUBMIT ASSIGNMENT NOW!