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# SLUTSKY EQUATION

(In economics) the relationship among the price elasticity of demand, the substitution leasticity of demand, and the income elasticity of demand.

by

Tweet## soojin park

on 27 May 2010#### Transcript of SLUTSKY EQUATION

Slutky equation what is it? the relationship among

the price elasticity of demand,

the substitution elasticity of demand, and the income elasticity of demand.

still don't know? That is, in market we can see

the total effect from a price

change decomposed into a substitution effect and an income effect. Total effect = substitution effect + Income effect + = where we can use it? ex)

apply it to determine how likely a good is to e a Giffen good based on whether it has a large or a small budget share.

to determine the effect of government policies that compensate some consumers Let's see the equation!! captures the total effect of a

price change - the change along an

uncompensated demand curve. It can break

this price elasticity of demand into two

terms involving elasticities that capture

the substitution and income effects It can be measured using the

pure substitution elasticity of

demand, which is the percentage that the quantity demanded falls for a given percentage increase in price if we compensate the consumer to keep the consumer's utility constant.

That is, it is the elasticity of the

compensated demand curve. The income effect is the income

elasticity, times the share of the

budget spent on that good. examples.

summary

Mimi buying beer for a year

Price = $12

Q boutgh = 26.7 gallons

Her beverge budget = $419

Price change to $6

Q2 = 44.5 gallons Let's make up number! Let's interprete the result! share of the budget=0,76=(12*26.7)/419=0.88

income elasticity=-0.76

prie elasyiciy=-0.09

Calculate the result! -0.76 = -0.09 + 0.76*0.88 (As beer is a normal good for mimi)

the size of total change is deu more

to the income effect than to the substitution

effect. If the price of beer rises by 1%

but Mimi is given just enough extra income

so that her utility remains constant, Mimi would

reduceher consumption of beer bt less than a tenth

of a percent(substitution effect).Without compensation, Mimi reduces her consumptionof beer by about three-quarters of a percent(total effect) This equaion is derived mathematically from graphical

relationship that the total effect from a price change

be decomposed into a substitution effect and an income

effect. Using the numbers calculated, we can observe

those realationship precisely.

Thank you :)

Full transcriptthe price elasticity of demand,

the substitution elasticity of demand, and the income elasticity of demand.

still don't know? That is, in market we can see

the total effect from a price

change decomposed into a substitution effect and an income effect. Total effect = substitution effect + Income effect + = where we can use it? ex)

apply it to determine how likely a good is to e a Giffen good based on whether it has a large or a small budget share.

to determine the effect of government policies that compensate some consumers Let's see the equation!! captures the total effect of a

price change - the change along an

uncompensated demand curve. It can break

this price elasticity of demand into two

terms involving elasticities that capture

the substitution and income effects It can be measured using the

pure substitution elasticity of

demand, which is the percentage that the quantity demanded falls for a given percentage increase in price if we compensate the consumer to keep the consumer's utility constant.

That is, it is the elasticity of the

compensated demand curve. The income effect is the income

elasticity, times the share of the

budget spent on that good. examples.

summary

Mimi buying beer for a year

Price = $12

Q boutgh = 26.7 gallons

Her beverge budget = $419

Price change to $6

Q2 = 44.5 gallons Let's make up number! Let's interprete the result! share of the budget=0,76=(12*26.7)/419=0.88

income elasticity=-0.76

prie elasyiciy=-0.09

Calculate the result! -0.76 = -0.09 + 0.76*0.88 (As beer is a normal good for mimi)

the size of total change is deu more

to the income effect than to the substitution

effect. If the price of beer rises by 1%

but Mimi is given just enough extra income

so that her utility remains constant, Mimi would

reduceher consumption of beer bt less than a tenth

of a percent(substitution effect).Without compensation, Mimi reduces her consumptionof beer by about three-quarters of a percent(total effect) This equaion is derived mathematically from graphical

relationship that the total effect from a price change

be decomposed into a substitution effect and an income

effect. Using the numbers calculated, we can observe

those realationship precisely.

Thank you :)