Sir John Hicks, a British economist, revised the demand theory in the 1930s. Here are the key points:
Revision of Demand Theory by Hicks
1. *Income Effect*: Hicks introduced the concept of the income effect, which states that a change in price affects a consumer's real income.
2. *Substitution Effect*: He also introduced the substitution effect, which states that a change in price leads to a substitution of one good for another.
3. *Separation of Income and Substitution Effects*: Hicks separated the income and substitution effects, which allowed for a more precise analysis of consumer behavior.
4. *Compensated Demand Curve*: Hicks introduced the concept of the compensated demand curve, which shows how the quantity demanded changes in response to a price change, holding real income constant.
5. *Consumer Surplus*: Hicks' revision of demand theory also led to the development of the concept of consumer surplus, which measures the difference between the maximum amount a consumer is willing to pay for a good and the actual price paid.
Importance of Hicks' Revision
1. *Improved Understanding of Consumer Behavior*: Hicks' revision of demand theory provided a more nuanced understanding of consumer behavior and the factors that influence demand.
2. *Development of New Analytical Tools*: Hicks' introduction of new concepts, such as the income and substitution effects, provided economists with new analytical tools for analyzing consumer behavior.
3. *Increased Accuracy in Demand Forecasting*: Hicks' revision of demand theory led to more accurate demand forecasting, as economists could now separate the income and substitution effects of a price change.
