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What is the relationship between Hicksian demand and Giffen goods in economics?
In economics, Hicksian demand refers to the quantity of a good or service that a consumer is willing to buy at a given price, assuming their income and preferences remain constant. Giffen goods are a rare type of good where the demand increases as the price rises, contradicting the law of demand. The relationship between Hicksian demand and Giffen goods is that Hicksian demand does not apply to Giffen goods because their demand does not follow the typical downward-sloping demand curve.
What is an example of Hicksian demand and how does it differ from other types of demand?
An example of Hicksian demand is when a consumer adjusts their purchasing choices in response to changes in prices, while keeping their level of satisfaction constant. This differs from other types of demand, such as Marshallian demand, which focuses on changes in purchasing choices based on changes in income and prices while maintaining the same level of utility.
Explain what is meant by compensating variation and equivalent variation?
There are three central measures of welfare in economics:-Consumer Surplus (using a "marshallian demand function) -Equivalent Variation (using Hicksian demand function) -Compensating Variation (also using Hicksian demand function) Although consumer surplus is the most common measure of welfare it is flawed - it is based on a quasi linear demand function - one in which income has no effect on the demand for the good. However if there are large income effects involved; the demand curve is no longer a simple marginal value curve but one in which the value placed on the additional unit is heavily influenced by the amount spent on prior units. The consumer surplus now has no meaning in the marshallian demand context.We want to ideally examine the effect of a price change allowing income to alter but maintaining utility at some fixed level. Therefore we must use a Hicksian demand function - one in which a price change will be matched with a corresponding change in income such that utility is maintained at some level. We can now utilise equivalent and compensating variation to examine the changes in welfare of the associated price change.Equivalent variation is the income that you need to take away from an individual to make him equivalently worse off or better off following a price change.The Compensating variation on the other hand is the amount of income you need to compensate an individual following a price change so that he remains on the same level of utility. For Equivalent variation we maintain utility at the new price ratio whereas in the case of compensating variation we maintain utility at the old price ratio.Assuming the income effect is significant enough to disregard consumer surplus as an effective measure of welfare change and also a rise in price of good 1; the hicksian demand function which holds income constant will thus be steeper than the marshallian demand (assuming normal good - if inferior the opposite is true). The hicksian demand function relating to the original price level will be associated with a higher utility than the other hicksian associated with the new and higher price. However we cannot observe utility, hence we are using these functions. The equivalent variation will be smaller than the change in consumer surplus which in turn will be smaller than the compensating variation. The intuition behind this is that for a normal good more income is required to compensate the individual for a rise in price to maintain utility than income to be taken away from an individual such that he lies on a same lower utility.
What is the difference between demand function and demand schedule?
Demand schedule: a list of demand/price equivalencies. It can best be seen as a table with discrete points. Demand function: a continuous function of price-demand interaction. Main difference: schedule is discrete; function is continuous.
What is a demand curve and how it is different from demand function?
The demand curve demonstrates what happens when a product is demanded by customers. A demand function refers to an event that can affect the demand curve.
What is the relationship between Hicksian demand and Giffen goods in economics?
In economics, Hicksian demand refers to the quantity of a good or service that a consumer is willing to buy at a given price, assuming their income and preferences remain constant. Giffen goods are a rare type of good where the demand increases as the price rises, contradicting the law of demand. The relationship between Hicksian demand and Giffen goods is that Hicksian demand does not apply to Giffen goods because their demand does not follow the typical downward-sloping demand curve.
What is an example of Hicksian demand and how does it differ from other types of demand?
An example of Hicksian demand is when a consumer adjusts their purchasing choices in response to changes in prices, while keeping their level of satisfaction constant. This differs from other types of demand, such as Marshallian demand, which focuses on changes in purchasing choices based on changes in income and prices while maintaining the same level of utility.
Explain what is meant by compensating variation and equivalent variation?
There are three central measures of welfare in economics:-Consumer Surplus (using a "marshallian demand function) -Equivalent Variation (using Hicksian demand function) -Compensating Variation (also using Hicksian demand function) Although consumer surplus is the most common measure of welfare it is flawed - it is based on a quasi linear demand function - one in which income has no effect on the demand for the good. However if there are large income effects involved; the demand curve is no longer a simple marginal value curve but one in which the value placed on the additional unit is heavily influenced by the amount spent on prior units. The consumer surplus now has no meaning in the marshallian demand context.We want to ideally examine the effect of a price change allowing income to alter but maintaining utility at some fixed level. Therefore we must use a Hicksian demand function - one in which a price change will be matched with a corresponding change in income such that utility is maintained at some level. We can now utilise equivalent and compensating variation to examine the changes in welfare of the associated price change.Equivalent variation is the income that you need to take away from an individual to make him equivalently worse off or better off following a price change.The Compensating variation on the other hand is the amount of income you need to compensate an individual following a price change so that he remains on the same level of utility. For Equivalent variation we maintain utility at the new price ratio whereas in the case of compensating variation we maintain utility at the old price ratio.Assuming the income effect is significant enough to disregard consumer surplus as an effective measure of welfare change and also a rise in price of good 1; the hicksian demand function which holds income constant will thus be steeper than the marshallian demand (assuming normal good - if inferior the opposite is true). The hicksian demand function relating to the original price level will be associated with a higher utility than the other hicksian associated with the new and higher price. However we cannot observe utility, hence we are using these functions. The equivalent variation will be smaller than the change in consumer surplus which in turn will be smaller than the compensating variation. The intuition behind this is that for a normal good more income is required to compensate the individual for a rise in price to maintain utility than income to be taken away from an individual such that he lies on a same lower utility.
What is the difference between demand function and demand schedule?
Demand schedule: a list of demand/price equivalencies. It can best be seen as a table with discrete points. Demand function: a continuous function of price-demand interaction. Main difference: schedule is discrete; function is continuous.
What is a demand curve and how it is different from demand function?
The demand curve demonstrates what happens when a product is demanded by customers. A demand function refers to an event that can affect the demand curve.
How did countries react to the demand to convert paper money into gold?
The demand to convert paper money into gold was a demand beyond what the treasuries of countries could supply.
Why price on y-axis in demand function?
bez when demand function have price on y-axis, its mean that price have the inverse relation to the demand, in other words price lead to demand curve.
What is demand function.what are its determinants of demand function?
the determinats demand are prices and non price factor
What is demand and quantity of demand?
Demand is a function that defines how much of a certain good are the consumers willing to purchase at a given price.Quantity of demand is the quantity of a certain good the consumers are willing to purchase at a given price, as defined by the function of demand.
What is the function of demand?
In straight proportion
How can one calculate the elasticity of demand from a demand function?
To calculate the elasticity of demand from a demand function, you can use the formula: elasticity of demand ( change in quantity demanded) / ( change in price). This formula helps determine how responsive the quantity demanded is to changes in price.
What is the shortcut for calculating the Cobb-Douglas demand function?
The shortcut for calculating the Cobb-Douglas demand function is to take the partial derivative of the function with respect to the price of the good in question.
