Description
This video explains how to build the Marshallian and Hicksian demand curves. We analyse Hicks’ decomposition of the income and substitution effect, from which we derive both demand curves.
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Marshallian and Hicksian demands stem from two ways of looking at the same problem – how to obtain the utility we crave with the budget we have. Consumption duality expresses this problem as two sides of the same coin: keeping our budget fixed and maximising utility (primal demand, which leads us to Marshallian demand curves) or setting a target level of utility and minimising the cost associated with it (dual demand, which gives us Hicksian demand curves).
Leads us to the main difference between the two types of demand: Marshallian demand curves simply show the relationship between the price of a good and the quantity demanded of it. Hicksian demand curves show the relationship between the price of a good and the quantity demanded of it assuming that the prices of other goods and our level of utility remain constant.
Marshallian and Hicksian demand curves meet where the quantity demanded is equal for both sides of the consumer choice problem (maximising utility or minimising cost).
Marshallian demand makes more sense when we look at goods or services that make up a large part of our expenses. Here, the income effect is very large. However, for smaller purchases, we are willing to spend more or less any amount as long as we derive the utility we expect to.
Learn more by reading the dictionary entry.
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