We thus conclude that when price consumption curve for good slopes downward, price elasticity of demand is more than one, that is, demand is elastic. We know that when consumer’s money expenditure on a good rises with the fall in price of the good, the demand for the good is elastic, i.e., elasticity of demand is more than one. 13.19 indifference map depicting preferences of the consumer is such that we get a downward sloping consumption curve which means, as explained above, that with the fall in the price of good X, consumer’s expenditure on it rises. It is thus clear that in the present case when the price consumption curve is sloping downward (i.e., PCC has a negative slope), with the reduction in price of the good X the consumer’s money outlay on the good X increases. Money expenditure AY 3 is greater than AY 2. Similarly, when the price of good X falls further so that AD is now the relevant price line, consumer is in equilibrium at Q 3 where he is spending AY 3 amount of money and is having OX 3 quantity of the good X. Thus, with the fall in price, his expenditure on the good X has increased. It means that at the lower price of good X he has spent AY 2 amount of money on it which is greater than the amount AY 1 of money which he spent at the original price. At this new equilibrium position Q 2 the consumer is getting OX 2 of good X and amount OY 2 of money is let with him. With this lower price or with price line AC, the consumer is in equilibrium at Q 2 on indifference curve IC 2. The new price of good X will be given by the slope of the new price line AC, i.e., OA/OC. Let price of good X falls, money income of the consumer remaining the same, so that we get a new price line AC. It means that he has spent AY 1 of money on the good X and has obtained OX 1 of its quantity. Thus, in this equilibrium position, he is having combination of OX 1 of good X and OY 1 of money.
At this price (i.e., with price line AB) the consumer is in equilibrium at point Q 1 on indifference curve IC 1 and is buying OX 1 of good X. The slope of the price line AB, i.e., OA/OB will give the price of good X.
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