COMPENSATED DEMAND CURVE EBOOK

An income-compensated demand curve is a variant of the demand curve for a good, service, or commodity where changes in price are. Lecture Note 6 Compensated and Uncompensated Demand. Functions with an . economics. Marshallian demand curves are simply conventional market. The former is derived by Hicks, when he tried to rejoin Marshall's consumer's surplus (CS). CS is a cost-benefit principle of some public project. When a project  What is the relation between compensated and uncompensated.


COMPENSATED DEMAND CURVE EBOOK

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COMPENSATED DEMAND CURVE EBOOK


The Hicksian Compensated Demand Curve: Compensated demand curve the compensated demand curve is based on the substitution effect of a change in the price of good X, we carry the above analysis further and derive the Hicks substitution effect.

Let us take away the increase in the real income of the consumer compensated demand curve to the fall in the price of X equal to PM of good Y and Q1 N of X good by drawing a compensated budget line MN parallel to the budget line PQ1.

This line MN is tangent to the original indifference curve I1, at point H.

COMPENSATED DEMAND CURVE EBOOK

The movement from point R to H on the I1, curve is the substitution compensated demand curve which traces out the demand curve D1, in the lower portion of the figure when the demand for X increases from OA to Compensated demand curve with the fall in its price from P to P1.

The Slutsky Compensated Demand Curve: In order to derive the Slutsky substitution effect, let us take away the increase in the apparent real income of the consumer equal to PMX of Y and Q1N1 of X by drawing the Slutsky compensated budget line M1N1, parallel to PQ which passes through the original point R on the I1, curve where he will buy the same quantity OA of X.

Compensated Demand Curve (With Diagram)

But since the price of X has fallen, he will buy more of it so that he compensated demand curve to point S on the higher indifference curve I2, which is tangent to the budget line M1N1 Thus the movement from R to S traces out the Slutsky compensated demand curve D2 in the lower part of the figure.

A perusal of the compensated demand curve D1 of Hicks and D2 of Slutsky shows compensated demand curve the curve D2 is more elastic than D1.

This is because the total expenditure on the purchase of good X is greater in the Slutsky approach than in the Hicks approach.

While the conventional demand curves D3 is more elastic than even the Slutsky demand curve D2. The mechanism is to shift back the compensated demand curve budget line back to the original lower indifference curve. The shift stands for the compensation to the loser.

COMPENSATED DEMAND CURVE EBOOK

If the gainer can fully compensate the loser and still be better off than before. The project is said to be viable. The substitution effect is a price change that alters the slope of the budget constraint but compensated demand curve the consumer on the same indifference curve i.

By this effect, the consumer is posited to substitute toward the good that becomes comparatively less expensive. If the good in question is a normal goodthen the income effect from the rise in purchasing power from a price fall compensated demand curve the substitution effect.