Microeconomics: Price Changes, Budget Lines, and the Price Consumption Curve
Effects of Price Changes on the Budget Line
A change in the price of a commodity leads to the rotation of the budget line ().
Specifically, an increase in the price of a good results in an inward rotation of the budget line towards the axis representing that specific good.
This rotation reflects a decrease in the consumer's purchasing power for that good, even if their nominal income () remains constant.
New Consumer Equilibrium and Quantity Demanded
A new equilibrium is established following a price change.
This occurs at the point where the new, rotated budget line is tangent to a lower indifference curve.
The shift from the original equilibrium to this new point demonstrates a reduction in quantity demanded of the product whose price has increased.
These dynamics are visually documented in Figure 8-7 on Page 140 of the source material.
The Price Consumption Curve (PCC)
By joining the old and new equilibrium points (the points of tangency between budget lines and indifference curves) as the price of a good varies, we derive the Price Consumption Curve ().
The represents the set of consumer-equilibrium bundles resulting from changes in the price of one good while the price of the other good and total income remain unchanged.