Hicksian Demand Function, Curve & Vs. Marshallian Demand

Hicksian demand

Hicksian demand in other words compensated demand is the quantity of demand for goods as a solution of minimizing consumer expenditure while assuming utility level of consuming these goods is constant.

In other words, Hicks assumes that consumers’ utility level for selected two goods is not changing when prices of these two goods are changing. So, consumers tries to minimize the cost of buying of the goods by changing the price combinations. According to Hicks, consumers remain on the same utility curve but they move to different budget lines.

I this article, we will discuss about the function and curve of the Hicksian (compensated) demand. After that we will discuss how compensated demand differ from the Marshallian demand.

Hicksian demand function/ Compensated demand function

x* = x(p_x, p_y, U)

p_{x –}Price of the considered good

p_{y –}Prices of other related goods

U – Utility level

The Hicksian demand function’s inclusion of U as a parameter suggests that it maintains consumer utility constant—that is, on the same indifference curve—while prices fluctuate. Another name for it is the “compensated demand”. The reason for this term is that one would need to modify the consumer’s income to maintain them on the same indifference curve as prices fluctuate.

Hicksian demand curve/ compensated demand curve

Because the customer receives compensation for the price shift, the Hicksian demand curve is also known as the compensated demand curve. That is, they get compensated for price increases so they can stay on their initial indifference curve. This compensation is favorable if the cost of the good increases. Naturally, this compensation will be negative if the price drops.
This compensation has the effect of lessening the magnitude of variations in the amount of the good consumed. Because the consumer has more money to spend, the quantity demanded doesn’t decrease as much when the price increases. Because some money is taken away, consumers tend not to increase their spending as much when prices drop.

Marshallian vs Hicksian demand

The main difference between Hicksian vs Marshallian demand as follows.

Marshallian (uncompensated) demand	Hicksian (compensated) demand
x* = x(p_x, p_y, I)	x* = x(p_x, p_y, U)
Marshallian demand in other words uncompensated demand is the quantity of demand for goods as a solution of maximizing the consumer utility while assuming the consumer expenditure level of consuming these goods is constant. Marshal assumes that consumers’ utility level for selected two can be changed when the prices of these two goods change.	Hicksian demand in other words compensated demand is the quantity of demand for goods as a solution of minimizing consumer expenditure while assuming the utility level of consuming these goods is constant. Hicks assumes that consumers’ utility level for selected two goods is not changing when the prices of these two goods are changing.
According to Marshallian demand, the relationship between price and quantity demanded of a good is determined by a combination of the substitution effect and income effect.	The substitution impact is isolated by the Hicksian demand function, which assumes that the consumer receives only the additional income needed to buy a bundle on the same indifference curve following a price increase.
Marshallian demand curve is more elastic.	Hicksian demand curve is less elastic.