Ch08SlutskyEquation(微观-范里安-(上海交通大学,赵旭).pptVIP

Chapter Eight Slutsky Equation 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. Effects of a Price Change Income effect: 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 Effects of a Price Change Effects of a 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. 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 Real Income Changes Real Income Changes Real Income Changes Real Income Changes Real Income Changes Pure Substitution Effect Slutsky isolated the change in demand due only to the change in relative prices by asking “What is the change in demand when the consumer’s income is adjusted so that, at the new prices, she can only just buy the original bundle?” Pure Substitution Effect Only Pure Substitution Effect Only Pure Substitution Effect Only Pure Substitution Effect Only Pure Substitution Effect Only Pure Substitution Effect Only Pure Substitution Effect Only And Now The Income Effect And Now The Income Effect The Overall Change in Demand Slutsky’s Effects for Normal Goods Most goods are normal (i.e. demand increases with income). The substitution and income effects reinforce each other when a normal good’s own price changes. Slutsky’s Effects for Normal Goods Slutsky’s Effects for Normal Goods Slutsky’s Effects for Normal Goods Since both