Economics 21: Intermediate Microeconomics
Topic 2: Consumer Theory - Buying and Selling
1
Economics 21: Intermediate Microeconomics
Topic 2:
Consumer Theory
Buying and Selling
Reference: Varian, Chapter 9
Outline:
I.
Introduction
II.
Slutsky Equation Revisited
I.
Introduction
We have seen how the Slutsky equation can be used to decompose the effect of a price change
into an income and a substitution effect. In particular, the Slutsky Equation showed that if money
income is held constant, and the good is normal, then a reduction in its price must lead to an
increase in demand. Money income, however, does not generally remain constant. In particular, if
a consumer has an in initial endowment,
!
1
of good 1, than a fall in the price of good 1 will lead
to a fall in the consumer’s income. In the more general case where we allow the consumer to buy
and sell, there are essentially two income effects: First, there is the
ordinary income effect
measures the increase in purchasing power resulting from a price change – i.e. when a price falls,
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- Summer '09
- JOHNG.SESSIONS
- Microeconomics, p1, giffen, EIE
-
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