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Ch8_class_09(2)

Ch8_class_09(2) - Chapter Eight Slutsky Equation Effects of...

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Chapter Eight Slutsky Equation
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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.
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Effects of a Price Change Income effect : the consumer’s budget of $m can purchase more than before, as if the consumer’s income rose, with consequent income effects on quantities demanded.
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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.
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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
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Real Income Changes x 1 x 2 Original budget constraint and choice
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Real Income Changes x 1 x 2 Original budget constraint and choice New budget constraint
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Real Income Changes x 1 x 2 Original budget constraint and choice New budget constraint ; real income has risen
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