Post on 08-Feb-2017
Jain University - MA Econom
ics 2015
SLUTSKY’S THEOREM Presented by Suparna Pani
Date – 10/5/2015
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Jain University - MA Econom
ics 2015
INTRODUCTION
When price of something goes down, we buy more of it. This lead to two effect:
INCOME EFFECT : it becomes less expensive , we have more purchasing power
SUBSTITUTION EFFECT: it offers more utility per unit of money
Price effect is the sum of substitution effect and income effect for a price change which is known as slutsky’s theorem
Jain University - MA Econom
ics 2015
3
Marshallian demand
orUncompensated demand curve
Hicksian demand
orCompensated
demand curve
Slutskytheorem
1.It deals with how demand changes when price changes holding money income constant
2.It maximise utlity given price and wealth
3.Marshallian demand is easier to observe
1.It deals with how demand changes when price changes holding the real income constant or utility constant
2.It minimise expenditure
3.Hicksian demand is more mathematically tractable
1.It is the total (Marshallian) price effect is equal to the sum of the substitution effect
(i.e,Hickisan price effect) plus income effect. Both function are related by slutsky eqation.
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Jain University - MA Econom
ics 2015
MATHEMATICALLYIts based on derivation of marshallian and hicksian demand∂xi⁄ ∂pj = ∂hi/ ∂pi – (xj* (∂xi/ ∂m)) TE SE IE Total effect: it shows total quantity of x that we
consume varies when we change price Substitution effect: Variation is due to finding similar
product(obtain from derivation of the Hicksian demand with regard price)
Income effect: change in our purchasing power affect the amount we consume of a certain goods(derivation of Marshallian demand with regard wealth)
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Jain University - MA Econom
ics 2015
GRAPHICALLY
Jain University - MA Econom
ics 2015ANALYSIS OF AGGREGATE EFFECT – DIFFERENT GOODS
Price Substitution Effect
Income Effect Total Effect = Substitution
Effect + Income Effect
Normal good ↓ X _ ↓ X _ ↓X+ ↓ X= ↓X( _)
Inferior good
1.[SE]>[IE]
2.[SE]<[IE]{Giffen goods}
3.[SE]=[IE]
↓ X _
↓↓ X _ ↓ X _
↓ X _
↑ X +
↑ X + ↑↑ X +
↑ X +
↓ X+ ↑ X= X ?
↓ ↓X+ ↑ X=↓ X(_)
↓ X+↑↑ X=↑X(+)
↓ X+ ↑ X=X
Independent good ↓ X _ X:constant(no income effect)
↓ X+ 0= ↓ X( _)
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Jain University - MA Econom
ics 2015
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