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Compensated and uncompensated Demand Curve
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.
The compensated demand curve can be explained in terms of both the Hicks and Slutsky approaches
to the substitution effect. The two-storey Figure 45(A) illustrates the construction of the Hicks and
Slutsky compensated demand curves and the uncompensated (or ordinary or Marshallian) demand
curve.
The upper portion of the figure shows the substitution effects of the Hicks and Slutsky analyses and
the combined price effect.
The lower portion of the figure shows the derivation of the Hicks and Slutsky compensated demand
curves and the ordinary demand curve. First consider the lower diagram (B) where the price of good
X is taken on the vertical axis. Point P is an arbitrary point on this axis which shows the price of X
when the budget line is PQ in the upper diagram. The fall in the price of X as shown by the budget
line PQ1 is reflected in point P1 in the lower diagram.
The Marshallian Uncompensated Demand Curve:
First we explain the derivation of the Marshallian uncompensated demand curve. Suppose the initial
equilibrium of the consumer is at point R where the budget line PQ is tangent to the indifference
curve I1, and OA of good X is bought by the consumer in the tipper diagram.
