How is compensated demand different from uncompensated demand?

Compensated demand, Hicksian demand, is a demand function that holds utility fixed and minimizes expenditures. Uncompensated demand, Marshallian demand, is a demand function that maximizes utility given prices and wealth.

What is a compensated demand?

Definition: the compensated demand curve is a demand curve that ignores the income effect of a price change, only taking into account the substitution effect. To do this, utility is held constant from the change in the price of the good.

Why is it called uncompensated demand?

A synonymous term is uncompensated demand function, because when the price rises the consumer is not compensated with higher nominal income for the fall in his/her real income, unlike in the Hicksian demand function. Thus the change in quantity demanded is a combination of a substitution effect and a wealth effect.

What is an uncompensated demand curve?

The Marshallian (uncompensated) demand curve deals with how demand changes when price changes, holding money income constant. The Hicksian (compensated) demand curve deals with how demand changes when price changes, holding “real income” or utility constant.

How is a compensated demand curve different from an ordinary demand curve?

A compensated demand curve ignores the income effect of a price change. It only measures the substitution effect. A compensated demand curve is therefore less elastic than an ordinary demand curve.

Which of the following demand curve is also known as the compensated demand curve?

The presence of U as a parameter in the Hicksian demand function indicates that this function holds consumer utility constant on the same indifference curve as prices change. Hicksian demand is also called compensated demand.

Why is Hicksian demand called compensated demand?

Hicksian demand is also called compensated demand. This name follows from the fact that to keep the consumer on the same indifference curve as prices vary, one would have to adjust the consumer’s income, i.e., compensate them. For the analogous reason, the Marshallian demand is called uncompensated demand.

What is the difference between ordinary demand function and compensated demand function?

The ordinary demand function also called the Marshallian demand function, is the function of the price of a commodity, price of corresponding commodity and income of the individual consumer. And the compensated demand curve has only a substitution effect in the demand curve.