Equivalent variation is a measure

Measurement

Measurement is the process or the result of determining the ratio of a physical quantity, such as a length, time, temperature etc., to a unit of measurement, such as the metre, second or degree Celsius...

 of how much more money a consumer would pay before a price increase to avert the price increase. Because the meaning of "equivalent" may be unclear, it is also called extortionary variation. John Hicks

John Hicks

Sir John Richard Hicks was a British economist and one of the most important and influential economists of the twentieth century. The most familiar of his many contributions in the field of economics were his statement of consumer demand theory in microeconomics, and the IS/LM model , which...

 (1939) is attributed with introducing the concept of compensating

Compensating variation

In economics, compensating variation is a measure of utility change introduced by John Hicks . 'Compensating variation' refers to the amount of additional money an agent would need to reach its initial utility after a change in prices, or a change in product quality, or the introduction of new...

 and equivalent variation.

It is a useful tool when the present prices are the best place to make a comparison.

The value of the equivalent variation is given in terms of the expenditure function

Expenditure function

In microeconomics, the expenditure function describes the minimum amount of money an individual needs to achieve some level of utility, given a utility function and prices....

 () as







where is the wealth level, and are the old and new prices respectively, and and are the old and new utility levels respectively.

Value function form

Equivalently, in terms of the value function (),



This can be shown to be equivalent to the above by taking the expenditure function of both sides at







One of the three identical equations above.