Chapter Eight Slutsky Equation
Chapter Eight Slutsky Equation
Effects of a Price Change What happens when a commodity's price decreases? Substitution effect(替代效应):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 (替代效应）: the commodity is relatively cheaper, so consumers substitute it for now relatively more expensive other commodities
Effects of a Price Change - Income effect(收入效应):the consumer's 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 （收入效应）: 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 y Original choice p2
Effects of a Price Change x2 x1 Original choice Consumer’s budget is $y. y p2
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