A.10 Marshallian and Hicksian demand curves Consumption – Microeconomics

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“And hicks and demands stem from two ways of looking at the same problem. How how to obtain the utility. We crave with the budget. We have let s start analyzing john richard hicks decomposition help us draw both the marshallian and hicks ian demand curves the x.

Axis or horizontal axis shows the amount of good x1 consumed. While the y axis or vertical. Axis shows. The amount of x2 consumed every consumer will have different indifference curves that represent bundles of goods that give them the same level of satisfaction or utility and the budget constraint that limits their consumption.

Given the current budget restriction. An individual will maximize their utility at the point. Where the restriction line is tangent to the indifference curve..

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This is denoted as point a this point being the initial equilibrium. Now let s say the price for good x1 decreases. This will consequently mean that the restriction line changes. Since the consumer can now consume more of good x1 and as a result a higher indifference curve can be reached offering more utility for the consumer again utility will be maximized.

Where the restriction line is tangent to the utility curve. Which occurs at point b. This point being the final equilibrium. The total effect in the increase in welfare is determined by the horizontal distance between point.

A and point b. We will adjust the monetary restriction with the objective to recover the initial level of utility. This is done in order to understand how the price is being in the same proportion as in the final state..

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Hence. The red parallel restriction line. We would have chosen the amount of goods x1 and x2 consumed. It must be noted that this reduction of the monetary restriction does not actually happen.

But is used to differentiate the substitution from the income effect point c. Would have been our equilibrium in this scenario. Since it maximizes. The consumers utility.

We can now more clearly see the different increases in welfare. The substitution effect and the income effect as a result of the decrease in the price of good x. One now let s draw the more shelleyan and hickson demand curves..

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The lower graph shows. The quantity of good x1 consumed on the horizontal axis and its price on the y axis point a can be drawn in the lower graph giving us the initial quantity bought as well as the initial price after the price of good x. One decreases. The quantity of good x1.

Bought is greater which gives us point b. The marshallian demand curve is determined by joining these two points point c. Corresponds to the same price as point b. But a lower quantity would have been bought again this point c.

Does not actually exist. But will help us build the hickson demand curve. The hick c..

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And demand curve will cross through points. A and c. And will consequently meet the more shelleyan demand at point a we can again analyze the different increases in welfare. The substitution effect and the income effect as a result in the decrease in the price of good x.

One marshallian and hicks ian demands can help us determine the exact amount of an increase or decrease on any consumers welfare another way of analyzing these changes is to use schlotzsky s equation. Which determines analytically. The amount of substitution and income effect you ” ..

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