slutsky - Slutsky Equation 64 Slutsky Equation A. We want a...

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Slutsky Equation 64 Slutsky Equation A. We want a way to decompose the effect of a price change into ‘‘simpler’’ pieces. 1. that’s what analysis is all about 2. break up into simple pieces to determine behavior of whole x m/p m'/p X Y Z x Substitution effect Income effect Shift Pivot Indifference curves 2 2 2 1 Figure 8.2
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Slutsky Equation 65 1. these are hypothetical changes 2. we can examine each change in isolation and look at sum of two changes C. Change in demand due to pivot is the substitution effect . 1. this measures how demand changes when we change prices, keeping purchasing power fixed 2. how much would a person demand if he had just enough money to consume the original bundle? 3. this isolates the pure effect from changing the relative prices 4. substitution effect must be negative due to revealed preference. a) ‘‘negative’’ means quantity moves opposite the direction of price D. Change in demand due to shift is the income effect .
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slutsky - Slutsky Equation 64 Slutsky Equation A. We want a...

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