your voice is so clear, this is the first video I've seen where youtube's automatically generated subtitles perfectly match what is being said in the video
Bob - thank you so much for your comment. I had no idea that You Tube has this feature, and it is good to know that this feature works well with my videos.
For the most part the technique to calculate compensating/equivalent variation in this video is similar to what is in Varian's Intermediate Microeconomics text - supplemented with my own notes that I have developed over time. Some other textbooks provide a different graphical method for calculating the CV/EV. Thank you for watching!
But the inverse demand curve tells you what the price p1 must be given that x1 is some optimal qty given that m and p2 are fixed, known constants in our demand function. How does p1 represent the ‘willingness’ surely it represents what p1 has to be if we are to exhaust our budget.
@Aiden - you are correct. It is important to note that the consumer surplus measured using the inverse demand curve (also known as the Marshallian demand curve) is only the approximation of the true consumer surplus. True consumer surplus (compensating or equivalent variation) would have to be measured using a Hicksian demand curve, for which utility is held constant. In that latter case, your interpretation of p1 is correct.
Leonardo, thank you for your question. Technically, you are correct, since the vertical axis is measured in units of X2, not in dollars. Conceptually, the idea behind CV is, how much do I have to give the consumer to make him/her as well off as they were before the price change? To find the CV as a dollar amount (1) Find the amount of X1 and X2 are in the bundle where the compensated budget line is tangent to the indifference curve; (2) Using the new prices, calculate how much the consumer would have to spend to purchase this bundle; (3) Subtract the original income from this amount. The difference is the CV. Hope this helps.
If I am understanding your question correctly, there are two main differences between CV and EV. One is what the baseline utility is. With CV - the baseline is whatever utility level the consumer had before the change, whereas with EV, the baseline is whatever utility level the consumer has (or would have) after the change. The other difference is when the payment/compensation is happening. With CV, the consumer is being paid (or paying, if their new utility is better than their old level) in the new state of the world. With EV, the consumer is paying or being paid before the change happens. Hope this answers your question.
![(M4E8) [Microeconomics] Consumer Surplus: Compensating and Equivalence Variations](http://i.ytimg.com/vi/J9GtoDx_BPI/mqdefault.jpg)
your voice is so clear, this is the first video I've seen where youtube's automatically generated subtitles perfectly match what is being said in the video
Bob - thank you so much for your comment. I had no idea that You Tube has this feature, and it is good to know that this feature works well with my videos.
Nice presentation mam, thank you
Thank you for watching!
Thanks ❤️🎉👈
Thank you for watching!
Thankyou!!! Could you mention the source(book) that you might be referring to?
For the most part the technique to calculate compensating/equivalent variation in this video is similar to what is in Varian's Intermediate Microeconomics text - supplemented with my own notes that I have developed over time. Some other textbooks provide a different graphical method for calculating the CV/EV. Thank you for watching!
But the inverse demand curve tells you what the price p1 must be given that x1 is some optimal qty given that m and p2 are fixed, known constants in our demand function. How does p1 represent the ‘willingness’ surely it represents what p1 has to be if we are to exhaust our budget.
@Aiden - you are correct. It is important to note that the consumer surplus measured using the inverse demand curve (also known as the Marshallian demand curve) is only the approximation of the true consumer surplus. True consumer surplus (compensating or equivalent variation) would have to be measured using a Hicksian demand curve, for which utility is held constant. In that latter case, your interpretation of p1 is correct.
Very clear and useful. Thanks!
Thank you for watching!
It is soooo helpful!!! Thank you so much!!!
Thank you for your helpful vid!
Glad you found it helpful. Thank you for the comment!
Thank you so much for this.
Thank you for watching!
Good vids but in this one you didn't actually explain how to solve CV and EV...
I think the vertical distance is equal to CV or EV only if price is 1, other way it's CV/p2, right?
Leonardo, thank you for your question. Technically, you are correct, since the vertical axis is measured in units of X2, not in dollars. Conceptually, the idea behind CV is, how much do I have to give the consumer to make him/her as well off as they were before the price change? To find the CV as a dollar amount (1) Find the amount of X1 and X2 are in the bundle where the compensated budget line is tangent to the indifference curve; (2) Using the new prices, calculate how much the consumer would have to spend to purchase this bundle; (3) Subtract the original income from this amount. The difference is the CV. Hope this helps.
+Katherine Silz-Carson thxs a lot!
Difference between cv and ev wiyj exampes
If I am understanding your question correctly, there are two main differences between CV and EV. One is what the baseline utility is. With CV - the baseline is whatever utility level the consumer had before the change, whereas with EV, the baseline is whatever utility level the consumer has (or would have) after the change. The other difference is when the payment/compensation is happening. With CV, the consumer is being paid (or paying, if their new utility is better than their old level) in the new state of the world. With EV, the consumer is paying or being paid before the change happens. Hope this answers your question.