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