Chapter eight Slutsky Equation
Chapter Eight Slutsky Equation
What are We doing in this Chapter? We take a further look at the comparative statics of demand function with respect to prices, We divide the changes in demand due to price changes into two effects Substitution effect Income effect? Why Deeper economic intuition
What Are We Doing in this Chapter? We take a further look at the comparative statics of demand function with respect to prices; We divide the changes in demand due to price changes into two effects: –Substitution effect; – Income effect? Why? Deeper economic intuition
Effects of a Price Change What happens when a commodity's price decreases? Substitution effect: the commodity is relatively cheaper, so consumers substitute it for now relatively more expensive other commodities
Effects of a Price Change What happens when a commodity’s price decreases? –Substitution effect: the commodity is relatively cheaper, so consumers substitute it for now relatively more expensive other commodities
Effects of a Price Change Income effect: the consumers budget of Sy can purchase more than before, as if the consumers income rose, with consequent income effects on quantities demanded
Effects of a Price Change – Income effect: the consumer’s budget of $y can purchase more than before, as if the consumer’s income rose, with consequent income effects on quantities demanded
Effects of a Price Change Consumer's budget is Sy Lower price for commodity 1 y pivots the constraint outwards p2
Effects of a Price Change x1 Lower price for commodity 1 pivots the constraint outwards. Consumer’s budget is $y. x2 y p2