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Monique Romo
303-569-163
Figure 7.c.1
Figure 7.c.1 illustrates a simple example of the Price Expansion Path. The blue lines represent the various budget
constraints. In this case, as the price of good x decreases, a consumer is now able to consume more of x, which
shifts their budget constraint outwards away from the origin. In terms of y, the consumers consumption of y does
not change as the price of x decreases, which is why they all meet up at the same point on the y-axis. A, B, and C
represent a consumers optimal point on their different indifference curves that lie tangent to their respective budget
constraints. Connecting these points makes up the Price Expansion Path (PEP).
Econ 11
Monique Romo
303-569-163
The PEP can take on several forms, as long as the indifference curves do not cross. For example, Figure 7.c.2 below
shows this example.
Figure 7.c.2
Figure 7.c.2 is NOT a possible PEP because a condition of ICs is that they are not allowed to cross. In the graph,
the BC crosses the PEP at three different points, but when the ICs are drawn, they cross. Therefore, this is not
possible.
PEP and Giffen Case
In other cases, the PEP could resemble something like Figure 7.c.3. This particular case is okay because after
drawing the budget constraints and allocating optimums and indifference curves, we see that they do not cross.
Figure 7.c.3
GIFFEN CASE
Px
Figure 7.c.3 represents a new PEP form and also illustrates the Giffen Case. In this example, the price of x
decreases, shifting the BC outwards. We would normally expect ones consumption of x to increase as we jump
from C to B, but in this case, the quantity of x decreases from 45 to 30. This is known as a Giffen Good. A good if
a Giffen Good when the price of that good decreases, but consumers decide to consume less of it.
Econ 11
Monique Romo
303-569-163
Figure 7.c.4
Figure 7.c.5
Figure 7.c.4 demonstrates the PEP we first saw. Just as before, as the price of x decreases, our budget constraint
shifts outward as we are able to consume more x. Bringing the price of x and the quantity consumed to a new graph,
we get Figure 7.c.5. Within this graph, we see how as the price of x goes down, the quantity consumed increases.
Point A in 7.c.4 becomes A in 7.c.5. Its shape and direction then becomes the Demand Curve.
Econ 11
Monique Romo
303-569-163
Study Questions
1. If the Price of good x decreases from $3 to $2 and our consumption increases respectfully from 10 to 11, the PEP
can be described as the following:
a)
b)
c)
d)
e)
downward sloping
horizontal
vertical
upward sloping
none of the above
2. As the price of a good decreases, how will our consumption change according to a simple PEP? How does our
budget constraint shift as a decrease in Px occurs?
3. What is the purpose of a PEP? What can we derive from it?
Answers
1. d) upward sloping
2. As the price of a good decreases, we will usually consume more of that good. If there is a decrease in Px, our
budget constraint shifts outward away from the origin.
3. A PEP shows what happens to the optimal point as the price of a product is changed. Connecting these optimal
points will give us a curve that traces the changes in such optimal points. We can then derive the Demand curve
from the PEP.