清华大学：《微观经济学》课程PPT教学课件（PPT讲稿）Chapter Eight Slutsky Equation

Chapter eight Slutsky Equation

Chapter Eight Slutsky Equation

What are We doing in this Chapter? We take a further look at the comparative statics of demand function with respect to prices, We divide the changes in demand due to price changes into two effects Substitution effect Income effect? Why Deeper economic intuition

What Are We Doing in this Chapter? We take a further look at the comparative statics of demand function with respect to prices; We divide the changes in demand due to price changes into two effects: –Substitution effect; – Income effect? Why? Deeper economic intuition

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 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 consumers budget of Sy can purchase more than before, as if the consumers income rose, with consequent income effects on quantities demanded

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 Consumer's budget is Sy Lower price for commodity 1 y pivots the constraint outwards p2

Effects of a Price Change x1 Lower price for commodity 1 pivots the constraint outwards. Consumer’s budget is $y. x2 y p2

Effects of a Price Change Consumer's budget is Sy Lower price for commodity 1 y pivots the constraint outwards p2 Now only Sy'are needed to buy the y original bundle at the new prices, as if the consumer's income has p2 increased by Sy -Sy

Effects of a Price Change x1 Lower price for commodity 1 pivots the constraint outwards. Consumer’s budget is $y. x2 y p2 y p ' 2 Now only $y’ are needed to buy the original bundle at the new prices, as if the consumer’s income has increased by $y - $y’

The Idea behind the Slutsky equation Divide the total changes to demand from a price change into 1)pure substitution effect; 2) an income effect

The Idea behind the Slutsky Equation Divide the total changes to demand from a price change into 1) pure substitution effect; 2) an income effect

Pure Substitution effect What is the change in demand when the consumers income is adjusted so that, at the new prices, she can only just buy the original bundle? L e, changes in demand without changes in real income

Pure Substitution Effect “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?” I.e., changes in demand without changes in real income

Pure Substitution Effect Only

Pure Substitution Effect Only x2 x1 x2 ’ x1 ’

Pure Substitution Effect Only

Pure Substitution Effect Only x2 x1 x2 ’ x2 ’’ x1 ’ x1 ’’