1. Microeconomics Corso E
John Hey

2. Chapter 19
The effect on behaviour and welfare of a change in a price.

3. The effect on behaviour and welfare of a change in a price.
We started this course with QUASI-LINEAR preferences, with money on the vertical axis and the quantity of the good on the horizontal axis.
Suppose that the price rises.
The individual is worse off – but by how much?
Remember that the indifference curves are parallel in a vertical direction.
So we can simply measure how much worse off by the vertical direction between the original indifference curve and the new (lower) one.
But what do we do if the curves are not parallel?

5. The effect on behaviour and welfare of a change in a price.
Consider now NON QUASI-LINEAR preferences.
m = 70
Suppose that the price rises from p = 0.8 to p =
The individual is worse off – but by how much??
Consider Stone-Geary preferences.
Let us go to Maple...

8. The effect on behaviour and welfare of a change in a price.
Let us now look at these two variations with quasi-linear preferences....

11. Chapter 19
The Compensating Variation is the amount of money that we need to give to the individual to compensate him or her for the rise in the price.
The Equivalent Variation is the amount of money that we should take away from the individual at the original price to make him or her just as worse off as the rise in the price does.
Usually the compensating variation is larger than the equivalent variation (except for quasi-linear preferences, when they are the same).
The Change in the Surplus of the individual is between the compensating variation and the equivalent.

12. Chapter 19
Goodbye!