Figure 3.12: Income-consumption curve and Engel curve for inferior good
(ii)
Price-Consumption Curve and Demand Curve
We know that if price of either goods change, the budget line will revolve at
the axis that represents the good with the change of price. If price of X
decreases, the budget line will revolve outside the X-axis. Consumer
equilibrium will also shift to the new budget line. Figure 3.13 illustrates a
series of budget lines revolving at the X-axis. Each budget line represents
the different tiers of price. ConsumerÊs income and price of Y is constant.
When the budget line revolves, the equilibrium point will also shift. When
Now, try to draw the income-consumption curve and Engel curve for good X
if good X is a necessity. If you place good X at the X-axis, what are the
assumptions needed for good Y?
YOUR IDEA
(a)
(b)

X
TOPIC 3
UTILITY ANALYSIS
72
we connect the equilibrium points, we have derived a price-consumption
curve.
Therefore, we can use this curve to derive individual demand curve and also to
calculate price elasticity of demand. To further clarify on how demand curve is
derived from the price-consumption curve, let us look at one example.
Figure 3.13: Price-consumption curve and demand curve
Assume that you have RM20 to be spent on X and Y. Line B
1
in Figure 3.13(a) is
your budget line when Y is priced at RM2 per unit and X priced at RM1 per unit.
Assume point E
1
as your equilibrium point and the quantity Y
1
and X
1
is your
optimal consumption combination.
Other budget lines are drawn based on different prices of X, that is, curve B
2
for
X priced at RM2.50, B
3
for X priced at RM3, and curve B
4
when X is priced at
RM4. Each price level will produce different equilibrium combinations and
Price-consumption curve shows the change in consumer equilibrium when
there is a change in price.