Compensated demand curve, Microeconomics

Compensated Demand Curve:

Compensated demand function for a commodity (say x1) of an individual consumer represents demand quantity for that good (which is purchased by the consumer) as a function of price of that good and prices of other goods under constant real income and constant other things. 

Notationaly, it is given by x1=x1(p1, p2, y),

where y is the real income. Demand curve for a good showing the relationship between demand quantity for that good and its own price given other things and given real income is known as compensated demand curve along which real income is constant (real income is defined by the ratio between money income and price level). Along the demand curve price of that good changes, so money income should be proportionately adjusted or compensated such that real income is constant. That is why the corresponding demand function and demand curve is known as compensated demand function and compensated demand curve.  

There are two different approaches to the measurement of real income, viz.,  

•  Hicksian Approach: In Hicksian approach, real income is measured in forms of utility. A constant real income means a constant utility. Thus, demand quantity for a good purchased by a consumer as a function of prices of all goods under constant utility and constant other things is known as compensated Hicksian demand function. 

Demand curve for a commodity showing the relationship between quantity demand for that commodity and it's own price under constant other things and constant real income in terms of utility is known as compensated Hicksian demand curve. 

•  Slutsky's Approach: In this approach, real income is measured in terms of purchasing power. A constant real income means a constant purchasing power (it is denoted by yp). Demand quantity for a good purchased by a consumer as a function of prices of all goods under constant other things and constant purchasing power is known as compensated Slutsky's demand function and corresponding demand curve is known as compensated Slutsky's demand curve.   

Posted Date: 10/26/2012 3:20:13 AM | Location : United States







Related Discussions:- Compensated demand curve, Assignment Help, Ask Question on Compensated demand curve, Get Answer, Expert's Help, Compensated demand curve Discussions

Write discussion on Compensated demand curve
Your posts are moderated
Related Questions
Emergence and Persistence of Structural Imbalances: The period broadly corresponds to the period of the Sixth Plan and the Seventh Plan. The Sixth Plan was launched when the e

Problem 1: Any development strategy should put people first; indeed, its very effectiveness should be measured in terms of how it impacts the poor. (a) Describe the link bet

The price elasticity of demand is how economists calculate the responsiveness of consumers to alters in prices for a commodity.  In other words, as price enhances (reduces), the qu

Stock of durable goods on hand: If the economy has enjoyed an extended period of prosperity, consumers may find themselves well supplied with various durable goods, e.g. cars,

a) Examine at least three (3) possible areas for the industry that could lead to transaction costs, and describe each in detail.   b) Speculate about the behaviour that could

Lack of Integration in Policy Formulation and Policy Implementation: A common thread uniting these diverse diagnoses and prescriptions can be seen among most of the critical e

Determine the profit maximizing price and quantity A firm has segmented its market into the following demand functions: P1 = 500 – 50Q     P2 = 500 – 20Q     with a cost fu

What is the difference between 'concept' and 'assumption'?  These two terms are very dissimilar. The term 'concept' refers to an idea or abstract principle. For instances, forc


When you drop by the only coffee shop in your neighbourhood, you notice that the price of a cup of coffee has enhanced  considerably since last week.  You decide it's not a big dea