Effects of a Price Change Consumer's budget is Sy Lower price for commodity 1 y pivots the constraint outwards p2 Now only Sy'are needed to buy the y original bundle at the new prices, p2 as if the consumers income has increased by Sy -y
Effects of a Price Change x1 Lower price for commodity 1 pivots the constraint outwards. Consumer’s budget is $y. x2 y p2 y p ' 2 Now only $y’ are needed to buy the original bundle at the new prices, as if the consumer’s income has increased by $y - $y’
The Idea behind the Slutsky equation Divide the total changes to demand from a price change into 1)pure substitution effect; 2) an income effect
The Idea behind the Slutsky Equation Divide the total changes to demand from a price change into 1) pure substitution effect; 2) an income effect
Pure Substitution effect What is the change in demand when the consumers income is adjusted so that, at the new prices, she can only just buy the original bundle?” Le, changes in demand without changes in real income
Pure Substitution Effect “What is the change in demand when the consumer’s income is adjusted so that, at the new prices, she can only just buy the original bundle?” I.e., changes in demand without changes in real income
Pure Substitution Effect Only
Pure Substitution Effect Only x2 x1 x2 ’ x1 ’
Pure Substitution Effect Only
Pure Substitution Effect Only x2 x1 x2 ’ x2 ’’ x1 ’ x1 ’’