In case of such products, the PCC will be backward sloping and the demand curve will be upward looking or positively sloped. That is, their demand will increase with a rise in price and their demand will fall with a fall in price of the product. Likewise, Giffen goods are those inferior goods which are exception to the law of demand. Thus, demand curve in case of an inferior good will be steeper. They are not the exception to the law of demand but the demand is less responsive to the price change. Inferior goods are those whose consumption falls with the rise in income. Similarly, co-ordinates of more points (say, point S) can be identified and a demand curve (DD 1) can be constructed by joining all such points. The two co-ordinates will provide us a point R on the demand curve in the lower panel. This level of consumption is extended to lower panel to represent quantity demanded. At this price, quantity demanded can be taken as equal to consumption of X by the consumer, which is OX 1, in the upper panel. The price level so identified (P 1) is marked on the Y-axis of the lower panel. For example, we can identify the price of X associated with the equilibrium point R from the budget line AB in the upper panel of the figure. The different price levels can be identified from the budget line relating to a point of equilibrium. To derive a demand curve, we require information on quantity demanded at different prices. The upper panel shows construction of a PCC while in the lower panel, derivation of the corresponding demand curve has been attempted.īased on the figure, following discussion may be carried out: Therefore, a derivation of demand curve from a PCC has been attempted in Figure-3.17 which has two panels. Why a demand curve needs to be derived from a PCC? It is because of the fact that while price levels are explicitly used in drawing a demand curve, it is implicitly involved in a PCC. Hence, it should be possible to derive a demand curve from a PCC. This is broadly the same as the law of demand which also shows an inverse price-quantity relationship – lower the price more will be the quantity demanded.
The PCC shows the relationship between consumption of a product and its price – lower the price more will be the consumption and vice versa. Derivation of Demand Curve from the PCC :
While at higher levels of prices, prior to R, it takes a negative slope and, thus, the PCC assumes a downward looking shape.
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