Welcome back. To test our understanding of the consumer choice theory that we laid out last week plus our understanding of price solicited demand, let's take a little bit closer look at the price consumption curve and how that gives us an indication of what the price solicited give demand is. And this is figure 4.12. And by the way this week we'll be covering the remainder of chapter 4 in the text a good chunk of chapter 5 and a little on chapter 6. Let's look where college education is on the horizontal axis. And we're using the composite good convention, putting dollar outlays on all other goods on the vertical axis, and let's look in particular at 4.12a. With a lower price college education the budget constraint pivots out. It originally was AZ, and as college education becomes lowered, the budget constraint pivots out to AZ prime. It leads to greater college consumption, and if we connect the dots where the optimal point is initially on indifference curve U1, later on, on a difference curve, U2 at the lower price, we get what was called, what is called the price consumption curve. Now notice how the slope of this price consumption curve tells us about the price elasticity of demand, for the good on the horizontal axis, in this case college education. And we can tell by what happens on the vertical axis on total outlays on other goods. Lower price college, greater college consumption. What'll happen to total outlays on college? The vertical axis measures total outlays on other goods. So figure 4.12a is a situation where lower price in college ends up with reduced expenditure on all other goods. Instead of A1, A2 is now spent on all other goods. And at the extreme if nothing is spent on college and all is spent on other goods, the consumer would have A to spend on other goods. So, what does this all mean? So, in this situation, expenditures on other goods go down when price of college education goes down. That means that if less is spent on other goods more most be spent on college education, and this is a case where greater college education consumption, greater quantity in response to a lower price, ends up resulting in higher total expenditures. The quantity has a dominating effect on total expenditures relative to the price. We observe that phenomenon when price elasticity of demand is greater than 1. When demand is elastic. Quantity pushes total expenditures around. And in the opposite direction from price. Let's look at the opposite scenario, figure 4.12c. This is a case where college consumption goes up at the lower price. same pivot of the budget line from AZ to AZ prime. But now we have an upward slope in price consumption curve, that connects the optimal points at the initial price and then the lower price of college education. Let's look on the vertical axis. This is a situation where expenditures on other goods go up from A1 to A2, when the price of college education goes down. What does this mean? If expenditures on other goods go up, that must mean that college, expenditures on college education go down. So this a situation where lower price, greater college consumption, lead to less college consumption. So this is a case where price does does the dominant driving on total expenditures on college, and then the opposite direction for the quantity. So figure 4.12c must be a case where demand for college education is inelastic. The ratio of the percentage change in quantity to the percentage change in price is less than 1, price has the dominant effect. Unit elasticity is the case, in figure 4.12b. No change in expenditure on other goods when there's a lower price at college. No change in expenditure on other goods means no change in expenditure on college education. Lower price, greater college consumption, no change in expenditures on college education. The two forces of price and quantity must just be balancing each other out. So the ratio of the price elasticity of demand must equal one. And then one could have cases where the price consumption curve is downward sloping, and later upward sloping. Where initially demand is elastic and then later on inelastic. And that is actually the typical case for a linear demand curve for an initial increase, a lower in price, that leads to initial amount of college consumed. Quantity will be having a dominant effect on total expenditures and the opposite direction from price. But then with more and more college consumption, at a certain point, the price impact, lower college, lower college price has more of an impact to relative to the amount of further college consumption generated. So just a way to test our knowledge of what price consumption curves indicate about price elasticity of demand.