The Marshall, Hicks and

Slutsky Demand Curves

Graphical Derivation
 We start with the following diagram:
y

In this part of the diagram we have drawn

the choice between x on the horizontal
axis and y on the vertical axis. Soon we
will draw an indifference curve in here.

x
px
Down below we have drawn the
relationship between x and its price
Px. This is effectively the space in
which we draw the demand curve.

x
y
Next we draw in the
indifference curves
showing the consumers’
tastes for x and y.
y0
Then we draw
in the budget
x0 x
constraint and
px find the initial
equilibrium.

x
 Recall the
y
slope of the
budget
constraint is:

y0
dy px

dx py
x0 x
px

x
y From the initial equilibrium we
can find the first point on the
demand curve

y0

x
px
Projecting x0 into the
diagram below, we
map the demand for
px0 x at px0

x0 x
 Next consider a rise in the price of
y x, to px1. This causes the budget
constraint to swing in as – px1/py0
is greater.

y0 To find the demand for

x at the new price we
locate the new
equilibrium quantity of x
x1 x demanded.
px
Then we drop a line
px 1
down from this point to
the lower diagram.
px0
This shows us the new
level of demand at p1x
x1 x0 x
y We are now in a position to draw
the ordinary demand curve.

First we highlight the

px and x
y0
combinations we
have found in the
lower diagram and
x then connect them
px with a line.

px1 This is the

Marshallian demand
px0 Dx curve for x.

x1 x0 x
 Our next exercise involves
y giving the consumer enough
income so that they can reach
their original level of utility U2.

To do this we take
y0 the new budget
U2 constraint and
U1 gradually increase
the agent’s income,
x moving the budget
x1 x0
px constraint out until
px1 we reach the
indifference curve U2
px0 Dx

x1 x0 x
 y The new point of
tangency tells us the
demand for x when
the consumer had
been compensated so
they can still achieve
y0 utility level U2, but the
U2
relative price of x and
U1 y has risen to px1/py0.
x
x1 xH x0 The level of demand for
px
x represents the pure
px1 substitution effect of the
increase in the price of x.
px0 Dx
This is called the
Hicksian demand for x
and we will label it xH.
x1 x0 x
 We derive the Hicksian
y demand curve by projecting
the demand for x
downwards into the
demand curve diagram.

y0
U2 Notice this is the
compensated
U1
demand for x when
x
x1 xH x0 the price is px1.
px

px1 To get the Hicksian

demand curve we
px0 Dx connect the new point to
the original demand x0px0

x1 xH x0 x
 y

We label the curve Hx

y0
U2
U1
x
x1 xH x0
px Notice that the Hicksian
demand curve is
px1 steeper than the
Marshallian demand
px0 Dx curve when the good is
a normal good.
Hx
x1 xH x0 x
 Notice that an
y
alternative
compensation
scheme would be to
give the consumer
enough income to
y0 buy their original
U2 bundle of goods
U1 x0yo
x
x1 xH x0
px
In this case the
px1 budget constraint
has to move out
px0 Dx even further until it
goes through the
point x0y0
Hx
x1 xH x0 x
 y But now the
consumer doesn’t
have to consume
x0y0

y0 U3
U2
U1
x
x1 x0
px
So they will choose
px1 a new equilibrium
point on a higher
px0 Dx indifference curve.

Hx
x1 xH x0 x
 y Once again we find the demand for
x at this new higher level of income
by dropping a line down from the
new equilibrium point to the x axis.

y0 U3
U2 We call this xs . It is
the Slutsky demand.
U1
x
x1 xs x0
px Once again this
px1 income compensated
demand is measured
px0 at the price px1
Dx

Hx
x1 xHxs x0 x
 y Finally, once again
we can draw the
Slutsky compensated
demand curve
through this new
y0 U3 point xspx1 and the
U2 original x0px0
U1
x
x1 xs x0
px The new demand
curve Sx is steeper
px1
than either the
px0 Marshallian or the
Dx
Hicksian curve when
the good is normal.
H
Sxx
xs x
 Summary

S
1. We
The
3.
can
normal
2.
TheThe derive three
Marshallian
Hicksian
Slutsky income
H Finally,
demand for a normal
curves on thegood
px demand
compensated
compensated curve
demand
demand
the
basis Marshallian
of our demand
indifference
M curve
curve
curve where
where
is agents
agents
flatter than are
have
the
given curve analysis.
sufficient income
sufficient
Hicksian, income
which to to
in turn is
maintain
purchase
flatter thanthemtheon
their their
original
Slutsky
original utilitycurve.
bundle.
demand curve.

x
 Problems to consider

1. Consider the shape of the curves if X is an inferior good.

2. Consider the shape of each of the curves if X is a Giffen
good.
3. Will it matter if Y is a Giffen or an inferior good?