Tsinghua Micro Ch8 Slutsky Equation 《微观经济学》.ppt

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. 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 The Idea behind the Slutsky Equation Divide the total changes to demand from a price change into pure substitution effect; 2) an income effect. 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 Pure Substitution Effect Only Pure Substitution Effect Is Always Negative! And Now The Income Effect And Now The Income Effect The Overall Change in Demand Question: What is the Contribution of Slutsky?Answer:1) A nice way to divide the total changes in demand;2) Show that the pure substitution effect is always negative. 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 the substitution and income effects increase demand when own-price falls, a normal good’s ordinary demand curve slopes down. The Law of Downward-Sloping Demand therefore always app