Compensated Demand Curve

A demand curve shows the effect of price on Quantity demanded. A change in price causes a substitution effect, but also an income effect. E.g. an increase in price, effectively reduces your disposable income so therefore, there is a double fall in demand. Firstly because the good is more expensive and secondly because income is lower.

Definition Compensated Demand Curve

A demand curve which ignores the income effect of a price change. A compensated demand curve is therefore less elastic than an ordinary demand curve.


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