compstat.8 - Econ 100A: Slutsky Equation (Chapter 8) Thomas...

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Unformatted text preview: Econ 100A: Slutsky Equation (Chapter 8) Thomas G. Koch Fall 2008 Thomas G. Koch Slutsky (8) 1(48) Clickers Turn on your clicker Hit a button Thomas G. Koch Slutsky (8) 2(48) Remember Giffen Goods? x * 1 p 1 > Difference between price effect and income effect With Giffen Goods Income effect was larger Thomas G. Koch Slutsky (8) 3(48) When the price of a good changes Decompose total effect How much because of substitution? How much because of income? Thomas G. Koch Slutsky (8) 4(48) Prices and Income Thomas G. Koch Slutsky (8) 5(48) When A Price Falls (I) The good becomes less expensive relative to other goods! Substitute into the cheaper good Substitution Effect Thomas G. Koch Slutsky (8) 6(48) When A Price Falls Thomas G. Koch Slutsky (8) 7(48) When A Price Falls (II) More bundles are possible Spending power of m grows Income Effect Thomas G. Koch Slutsky (8) 8(48) When A Price Falls Thomas G. Koch Slutsky (8) 9(48) Consider two prices ( p 1 , p 2 ) ( p 1 , p 2 ) Original consumption ( x 1 , x 2 ) Thomas G. Koch Slutsky (8) 10(48) Total Effect x 1 = x 1 ( p 1 , m )- x 1 ( p 1 , m ) Thomas G. Koch Slutsky (8) 11(48) Controlling for income How much money required for ( x 1 , x 2 ) at new prices ( p 1 , p 2 ) New income m m = p 1 x 1 + p 2 x 2 Thomas G. Koch Slutsky (8) 12(48) When A Price Falls Thomas G. Koch Slutsky (8) 13(48) Two Incomes m = p 1 x 1 + p 2 x 2 m = p 1 x 1 + p 2 x 2 Thomas G. Koch Slutsky (8) 14(48) When A Price Falls Thomas G. Koch Slutsky (8) 15(48) Now with...
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This note was uploaded on 09/12/2011 for the course ECON 100A/ 100B taught by Professor Staff during the Fall '08 term at UCSB.

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compstat.8 - Econ 100A: Slutsky Equation (Chapter 8) Thomas...

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