Prof Hicks Concept of Consumer’s Surplus
Professor Hicks has further developed the concept of consumer surplus and has propounded four kinds of consumer’s surpluses which are :
(i) Price Compensating Variation
(ii) Price Equivalent Variation
(iii) Quantity Compensating Variation
(iv) Quantity Equivalent Variation
The discussion of all these Kirov consumer’s S. Plus is beyond the scope of this book, Marshall.an consumer’s surplus which we have explained above with the help of indifference curve technique is called ‘Quantity Compensating Variation’, in the new Dickensian terminology.
(a) Price Compensating Variation : According to Hicks, it is the maximum amount of money the consumer will pay for the privilege of buying a commodity at a lower price.
AB’ is the budget line, ‘ON is the total amount of money with the help of this money a consumer can buy ‘OB’ amount of good ‘X”. The consumer is in equilibrium at point ‘P’. Now let us assume the price of ‘X’ falls, due to this the budget line shifts to AD’ and the consumer is in equilibrium at point ‘Q’ on the higher indifference curve te2 As the comsumer is rational one he is interested in consuming the same amount or wants to remain on lC” but a little better position, which was earlier not available on ‘AD’ budget line. Let us draw a parallel line ‘MN’ to budget line ‘AD, MN’line is tangent to at point ‘R’. In the above diagram ‘AM’ amount of money is taken away from the consumer. Earlier the consumer was on equilibrium on ‘ICI’ at point ‘P’ at higher price but now he is on ICI only but at point ‘R” which is buying with lower price. Hence, AM is the price compensating variation.
(b) Price Equivalent Variation. It is nothing but, the minimum sum, the consumer will accept for forgoing (sacrificing) the opportunity of buying at a lower price.
Now, let us draw a parallel line to original budget line ‘AB’ Such that the new budget line is tangent t at point. It can be concluded that due to fall in price of a consumer can reach to higher indifference curve at point but the same welfare or satisfaction can be achieved, if the , consumer income is increased from. A to OP or by AP amount. Hence ‘AP’ amount is Price equivalent variation.
(c) Quantity Compensating Variation, It is nothing but the maximum amount of money a consumer will be willing to pay for the privileged of buying a good at a lower price.
(d) Quantity Equivalent Variation : It is nothing but the sum of money the consumer will accept for forgoing the opportunity of buying the commodity at a lower price.
AS’ is the initial budget line and the consumer is in equilibrium at point on ‘. Let u assume that the price of falls and the budget line shifts to ‘AD’ and the consumer is in equilibrium at point ‘. The consumer’s welfare is increased, at point ‘b’ the consumer will be buying more than earlier. The consumer is willing to pay or amount of money to remain on amount .This is because at point he (the consumer) will be gentling the same satisfaction as that of at point excellence ‘ac’ is “quantity equivalent variation.