Table of Contents
- 1 What is a compensated demand curve?
- 2 Which curve is used to measure consumer surplus?
- 3 How is consumer surplus explained through indifference curve?
- 4 What is the difference between ordinary demand function and compensated demand function?
- 5 Why is the area below the demand curve above the price?
- 6 What is the relationship between marginal value curve and demand curve?
What is a compensated demand curve?
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.
Which curve is used to measure consumer surplus?
Measuring Consumer Surplus Consumer surplus is measured as the area below the downward-sloping demand curve, or the amount a consumer is willing to spend for given quantities of a good, and above the actual market price of the good, depicted with a horizontal line drawn between the y-axis and demand curve.
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.
In what way does the demand curve represent the benefit consumers receive from?
ANSWER: Consumer surplus measures the benefit to buyers of participating in a market. ANSWER: Because the demand curve shows the maximum amount buyers are willing to pay for a given market quantity, the price given by the demand curve represents the willingness to pay of the marginal buyer.
How is consumer surplus explained through indifference curve?
The Marshallian consumers’ surplus can also be measured by using indifference- curves analysis. The budget line of the consumer is MM’ and its slope is equal to the price of commodity x (since the price of one unit of monetary income is 1). Given Px, the consumer is in equilibrium at E.
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.
How is the benefit received by buyers in the market measured?
What is consumer surplus, and how is it measured? ANSWER: Consumer surplus measures the benefit to buyers of participating in a market. It is measured as the amount a buyer is willing to pay for a good minus the amount a buyer actually pays for it.
What does the compensated demand curve show?
The compensated demand curve shows the quantity of a good which a consumer would buy if he is income-compensated for a change in the price of that good. In other words, the compensated demand curve for a good is a curve that shows how much quantity would be purchased at the changed price by the consumer if the income effect is eliminated.
Why is the area below the demand curve above the price?
The area below the demand curve and above the price measures the consumer surplus in a market. The reason is that the height of the demand curve measures the value buyers place on the good as measured by their willingness to pay for it. The difference between this willingness to pay and the market price is each buyer’s consumer surplus.
What is the relationship between marginal value curve and demand curve?
The marginal value curve is the inverse of demand function. Consumer surplus is represented in a demand graph by the area between demand and price.
How do you find the consumer surplus?
The consumer surplus represents the consumer’s gains from trade, the value of consumption to the consumer net of the price paid. The consumer surplus can also be expressed using the demand curve, by integrating from the price up to where the demand curve intersects with the price axis.