 Module 19, change in consumer equilibrium due to product price. Consumers optimal choice of commodities changes whenever there is change in prices of the commodities. In our example, where consumer is using apples and oranges to get satisfaction, if there is change in prices of apples or oranges or income of the consumer, there is change in consumers equilibrium. There is change in optimal choice of the consumer where consumer is maximizing his satisfaction. So, whenever there in fact demand for any commodity depends upon prices of commodities that are being used by a particular consumer and income of the consumer. So, changes in prices of commodities and income leads to change in consumers demand for apples and oranges and consumer always make demand for set quantity of commodities where he is maximizing his satisfaction. As we are using apples and oranges to denote the consumer satisfaction, if we assume there is no change in prices of oranges, there is no change in income of the consumer, there is only change in prices of apples. Because of that change in price of apples, there is change in demand for apples, oranges and if we assume there is a decrease in price of apples, because of that decrease in price of apples, quantity demand for apples will increase. This increase in quantity demand is because of income effect and substitution effect. In relative terms, when price of apples decreases while price of oranges remain constant, consumer will substitute certain quantity of oranges with apples. He will increase the consumption of relatively cheaper commodity as compared to expensive commodity. In this case, as we are considering that the price of apples will decrease and if there is no change in the price of oranges, then the consumer will substitute a certain portion of oranges with apples. When he substitutes that certain portion of oranges with apples, we call this change as substitution effect. A substitution effect occurs when price of apples decreases as compared to oranges, he will substitute certain quantity of oranges with apples and similarly because of that decrease in price of apples, there is change in purchasing power of the household, there is change in purchasing power of the consumer. Because of decrease in price of apples, consumer has ability, consumer has capacity to purchase more quantity of apples. For example, initially we assume a price of apple is equal to 40 and income of the consumer is equal to 200, then if he allocates all of his income on the purchase of apples, he can purchase 5 units of apples. But if price of apples becomes 20, now by using same level of income, he is in a position to purchase more quantity of apples. So, whenever there is change in prices of commodities, there is change in purchasing ability of the consumer and this change in purchasing ability, purchasing capacity of the consumer is called as real income effect. Whenever price of a commodity changes, it in fact involves two types of the effect, one is substitution effect and other one is income effect. Under substitution effect, he will substitute one commodity with another commodity because of change in relative prices of two commodities. While because of change in real purchasing power of the household, there is also change in purchase of quantities of commodities that are being considered by that particular consumer and this change is observed under income effect. In this diagram, we are denoting three different budget lines denoted with BL0, BL1 and BL2. All these budget lines are downward sloping straight line. If we assume BL1 is the original budget line, along this original budget line, consumer is maximizing his satisfaction by using B combination of oranges and apples. But if we assume price of apples decreases because of that decrease in price of apples, our budget line reverts outward. Under new market condition, no consumer is in a position to maximize his satisfaction along IC2 indifference curve. Along IC2 indifference curve, he will choose combination C of apples and oranges to maximize his satisfaction. By moving from IC1 to IC2, there is increase in satisfaction of the consumer. This increase in satisfaction of the consumer is because of decrease in price of apples and because of this decrease in price of apples, there is change in quantity demand for apples by that particular consumer and this change in quantity demand has two effects. One is substitution effect and other one is income effect. Similarly, if we assume that there is increase in price of apples, because of that increase in price of apples, budget line will pivot inward from BL1 to BL0. Against BL0 budget line, consumer can maximize his satisfaction by choosing combination A of oranges and apples. Along A is the combination of apples and oranges that lie on IC0 and BL0 curve simultaneously. A is the combination of apples and oranges where slope of the budget line is equal to slope of indifference curve. And by joining all these combinations, all these optimal choices of the consumer against different budget constraint, we can obtain a curve that is called as price consumption curve. In this diagram, this red colored line that connects the optimal choices of the consumer against different budget constraint is the price consumption curve. It shows quantities of apples and oranges bought by consumer when price of apples changes. In this diagram, in fact, we assume there is no change in price of oranges. There is no change in income of the household. There is only change in price of apples and because of that change in price of apples, there is change in the quantities of oranges and apples that are being purchased by that particular consumer. So price consumption curve is a curve that shows quantities of apples and oranges bought by the consumer when price of apples changes. On the basis of that price consumption curve, we can derive demand curve of apples. Demand curve basically reports all different combinations of price and quantity demand of apples. It basically reports demand curve, reports different combinations of price of quantity and quantity of commodity under consideration. As in this case, we are making discussion with reference to apples. If there is increase in price of apples, there is a decrease in quantity demand for apples. And if there is decrease in price of apples, then there is increase in quantity demand for apples. In this diagram, if we assume price of apples is close to 90, consumer is willing to have a quantity of apple less than 2. And that 2 is reported by using combination A in this price consumption curve. Similarly, if price of apples becomes 40, then consumer is willing to have 2.5 units of apples. And these 2.5 units of apples, we are basically reporting in this diagram by combination. Initially, if we assume price of apples is equal, in this case, if price of apples is equal to 40, then consumer is willing to have 2.5 units of apples. And if there is a decrease in price of apples, if price of apples becomes 20, then consumer is willing to have around 6 units of apples. So on the basis of price consumption curve, we derive demand for apples. Price consumption curve denotes different combination of two commodities that a consumer will choose against different prices of one commodity. And the commodity that we considered here is apples. If there is change in price of apples, there is change in the optimal quantities of apples and oranges. There is change in the combination of the commodities against which consumer is maximizing his satisfaction. So demand curve basically denotes all willingness and ability to buy. And this willingness and ability to buy denotes those quantities where consumer is maximizing his satisfaction. And demand curve basically describes, we usually describe demand curve at a particular time and at a specific market. It might be possible there is a change in demand over time. It might be possible after certain time period, there is a change in demand. It might be possible there is increase in demand. It might be possible there is decrease in demand because of change in preferences of the consumer. Similarly, in fact the price consumption curve is the first step towards deriving the consumer demand curve. In the derivation of the demand curve, price consumption curve is the first step. Price consumption curve in fact denotes the quantities that a consumer is willing to have against his given budget constraint. The price consumption curve as demand curve is willingness and ability to buy against different prices and we are deriving this willingness and ability to buy on the basis of price consumption curve. Hopefully after this module you are very much clear about the impact of change in price of one commodity on consumers equilibrium. If price of commodity decreases, there is increase in level of satisfaction of a particular consumer. Because of decrease in price of one commodity consumer has an ability to buy more quantities of commodity under consideration. And when we say because of decrease in price of one commodity consumer is willing to have more quantity of that particular commodity then in fact we are making an assumption commodity under consideration is a normal commodity. If most of goods that are being used by a particular consumer, there is a negative association between price and quantity demand. If price decreases, there is an increase in quantity demand for that particular commodity.