Since good X and Y are substitutable goods, with an increase in demand for good X, the buyer has reduced the demand for good Y from Y 1 to Y 2 and from Y 2 to Y 3 respectively.
In the figure, the consumer has shifted from E 1 to E 2 and from E 2 to E 3 with a fall in the price of good X and increased the demand for good X continuously from X 1 to X 2 and from X 2 to X 3 respectively. Suppose there is a fall in price, as a result of the real income of the consumer increases so that the consumer attains equilibrium at different prices and different higher ICs. In the upper section of the figure, AB is the initial budget line and tangent with the indifference curve IC 1 at point E 1 showings X 1 and Y 1 units of consumption by the consumer. In the above figure, the upper part shows the derivation of the price consumption curve for substitutable normal goods and the lower part shows the derivation of the price demand curve. Price Effect and Derivation of Demand Curve/Case of Normal and Substitute Goods The derivation of the price demand curve in the case of normal and substitutable goods is shown with the help of the following diagram. Case-I: When Two Goods are Normal and Substitutable
Here we will derive the demand curve of a normal good with the help of a price consumption curve. Joining different equilibrium points, we obtain the price consumption curve and with the help of the PPC, we can derive the demand curve for the product (price effect and derivation of the demand curve). Likewise, if there is a rise in the price then it will reduce the consumer’s purchasing power, and the budget line swings to the left signifying less quantity of purchase by the consumer. As a result, the budget line swings towards the right, and the consumer will obtain equilibrium at the upper indifference curve.
When there is a decrease in the price, the real income of the consumer rises, and that leads to a rise in the purchasing power of the consumer. The change in the price of the commodity has a direct effect on the consumer’s demand for that commodity. The price effect is defined as the change in quantity demanded of a commodity due to a change in its price, assuming the price of other goods and income of the people remains the same. To explain the derivation of the demand curve with help of price consumption curve (Price effect and derivation of the demand curve)
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