Question

How do I use the Walrasian and Hicksian demand to show the substitution and income effect across different goods? Explain the process and link between them please.

Answer 1

Marshallian demand it is at times called as walrasian demand for an encompassing sated demand because the original analysis of marshallian refuse the effects of wealth. Marshallian and hicksian demand provide two alternatives of obtaining the utility. Having budget fixed utility chillati to be maximized or a utility target level is fixed keeping minimum cost. it saves way for getting the actual difference in between two types of the demand. Walrasian demand depicts the relationship existing between the price and quantity demanded of a good. whereas hicksian demand curve depicts the relationship between the price and the quantity demanded having assumed that prices of other goods and the consumers utility remain constant. When consumption duality is taken into consideration for the purpose of dual consumption if fixed level of utility is maintained hence the level of wealth or income are kept constant. Walrasian and the hicksian demand curve interact when the quantity demanded on both the sides is equal. when price is above the equilibrium point wealth of the consumer is higher with the hicksian demand curve rather than the marshallian demand curve. Real wealth is assumed to be an change in the hicksian demand curve. Nominal wealth being equal is assumed by the marshallian demand but in this when the level of price drops consumer is said to be better off. that is the reason marshallian demand curve are said to be more stable as they reflect the rent effect as well as the substitution effect.