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
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’
Effects of a Price Change Changes to quantities demanded due to this ' extra income are the income effect of the price change
Effects of a Price Change Changes to quantities demanded due to this ‘extra’ income are the income effect of the price change
Effects of a Price Change Slutsky discovered that changes to demand from a price change are always the sum of a pure substitution effect and an income effect
Effects of a Price Change Slutsky discovered that changes to demand from a price change are always the sum of a pure substitution effect and an income effect
Real Income Changes Slutsky asserted that if, at the new prices, less income is needed to buy the original bundle then " real income is increased more income is needed to buy the original bundle then "real income is decreased
Real Income Changes Slutsky asserted that if, at the new prices, – less income is needed to buy the original bundle then “real income” is increased –more income is needed to buy the original bundle then “real income” is decreased
Real Income Changes Original budget constraint and choice
Real Income Changes x1 x2 Original budget constraint and choice
