Posts

Compensating Variation (CV) vs. Equivalent Variation (EV)

Image
  In welfare economics, Compensating Variation (CV) and Equivalent Variation (EV) are standard money-metric measures used to evaluate the welfare effects of price changes. They are conceptually similar, but they differ in which utility level is held fixed and as a result ultimately yield different numerical values . 1) Compensating Variation (CV) Definition. Compensating Variation is the amount of money that must be given to (or taken from) a consumer after a price change so that the consumer can reach their original utility level . Formal expression (expenditure function). \( CV = E(p_{1}, u_{0}) - E(p_{1}, u_{1}) \) \( E(p, u) \): expenditure function (minimum expenditure to achieve utility \( u \) at prices \( p \)) \( p_{1} \): new price vector \( u_{1} \): new utility level \( u_{0} \): initial utility level Economic interpretation. Prices change first, and compensation is pro...
Post a Comment
Read more

Elasticity of Substitution

  Recently, while studying production functions, I revisited a simple yet remarkably insightful concept. I would like to briefly summarize it here. 1. Marginal Rate of Technical Substitution (MRTS) Before diving into the concept of elasticity of substitution, it would be helpful to first review the marginal rate of technical substitution. The Marginal Rate of Technical Substitution (MRTS) measures the rate at which a firm can substitute capital for labor while keeping output constant. It is defined as the slope of an isoquant: $$ MRTS_{LK} = -\frac{dK}{dL}\bigg|_{Q} = \frac{MP_L}{MP_K} $$ Under the cost-minimization condition, the MRTS equals the ratio of input prices: \( MRTS = \frac{w}{r} \), where \( w \) is the wage rate (price of labor) and \( r \) is the rental rate of capital. 2. Elasticity of Substitution The elasticity of substitution measures how easily one input can be substituted for another while ma...
Post a Comment
Read more

Starting my Economics Logbook

Hello, and welcome to Economics Logbook ! I started this blog as a space to organize and record what I have studied in economics. Most of the posts will be short summaries or notes based on what I have learned, rather than professional commentary or research. This logbook is mainly for my own review, but I hope it can also be helpful to anyone studying similar topics. I'll be updating it gradually as I continue my studies. Thanks for visiting!
Post a Comment
Read more