Price-Consumption Curve

Price-consumption curve is a graph that shows how a consumer’s consumption choices change when price of one of the goods changes. It is plotted by connecting the points at which budget line touches the relevant maximum-utility indifference curve.

Since consumers have limited income, they must choose their consumption basket keeping in view their budget constraint. A consumer’s budget line plots all such combinations of two goods which he can afford. There are two causes of a budget line shift: change in income or change in the relative price of goods in the consumption basket. When price of one good changes relative to others, it causes a rotation in the budget line.

Income-consumption curve is a similar graph which traces changes in demand in response to changes in income.


Let’s consider Michael who has monthly income of $3,000, 7% of which he wants to spend on books. He wants to decide how many books he should buy in hardcover and how many in paperback. A paperback costs $20 and a hardcover costs $30.

Michael’s consumption budget is $210 (7% of $3,000) which he can use to buy 9 paperbacks (and 0 hardcovers) or 6 hardcovers (and 0 paperbacks) or any intermediate combination. This is represented by the budget line BL-1 in the graph below.

Price-Consumption Curve

If the price of paperbacks fall to $15, Michael can now purchase more paperbacks (14 to be exact i.e. $210/$15) with the same budget. Alternatively, if the price increases to $30, Michael can no longer afford the same number of paperbacks. These price movements cause Michaels’ budget line to move along the x-axis as shown in the graph above.

When paperbacks become more experience, Michael’s budget line rotates from BL-1 to BL-2. This causes Michael to substitute more hardcovers for paperbacks such that his consumption choice (i.e. point of intersection of BL-2 and the relevant highest indifference curve) becomes Point A (corresponding to 4 hardcovers and 2 paperbacks). On the other hand, when paperbacks become cheaper and budget line moves from BL-1 to BL-3, consumption bundle switches from B to C.

by Obaidullah Jan, ACA, CFA and last modified on is a free educational website; of students, by students, and for students. You are welcome to learn a range of topics from accounting, economics, finance and more. We hope you like the work that has been done, and if you have any suggestions, your feedback is highly valuable. Let's connect!

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