PRICE EFFECT

by • 24/06/2011 • B.COM PART 1 EconomicsComments (0)760


“ Price effect may be defined as the measure of a change in the consumer’s equilibrium and the resulting change in the price of that commodity only; price of the other commodity and money income of the consumer remaining constant.”

Explanation:

Suppose consumer income = Rs. 10

Price of y per unit = Rs. 1

Price of x per unit = Rs. 2, 1, 1

In this condition consumer equilibrium will be on E where IC2 touches budget line AA. Now we assume that price reduced from Rs 2 to Rs 1 now new budget line will be AB consumer’s equilibrium will be E1 where IC3 touches budget line AB, and if price X increases from Rs. 2 to Rs. 4 the budget line will be AC and consumer’s equilibrium will move on E2 where IC1 touches AC budget line. Price consumption curve PCC is obtain by joining all equilibrium points of different curves.

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