Price Consumption Curve is always backward sloping in

Solution

7. Solution: Price Consumption Curve (PCC) The Price Consumption Curve is a graphical representation in economics that shows the different quantities of a good a consumer will purchase as its price changes, assuming all other factors, such as income, prices of other goods, and preferences, remain constant. It is derived from a series of tangency points between the budget lines and indifference curves, representing the consumer's optimal consumption bundles at different prices. Giffen Goods A Giffen good is a rare type of inferior good where the demand for the product increases as its price rises, and decreases as its price falls. This phenomenon, known as the Giffen paradox, violates the basic law of demand. This occurs because the income effect (the change in consumption due to a change in real income) is so strong and positive that it outweighs the substitution effect (the change in consumption due to a change in relative prices). How the PCC Behaves with Giffen Goods For a Giffen good, when the price of the good falls, the consumer's real income increases. Since it's an inferior good, the consumer will tend to buy less of it and substitute it with a more desirable, albeit more expensive, good. This causes the quantity demanded of the Giffen good to decrease. Conversely, when the price of the Giffen good increases, the consumer's real income decreases, forcing them to substitute more expensive goods with the now-pricier, but still cheapest, Giffen good, leading to an increase in demand. On a graph, this results in a backward-sloping or upward-sloping Price Consumption Curve, as the consumer's optimal consumption point for the Giffen good moves to the left when the price falls and to the right when the price rises.