Tsinghua Micro Ch8 Slutsky Equation 《微观经济学》教学文稿.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 x1 Lower price for commodity 1 pivots the constraint outwards. Consumer’s budget is $y. x2 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 x2 x1 x2’ x1’ Pure Substitution Effect Only x2 x1 x2’ x2’’ x1’ x1’’ Pure Substitution Effect Only x2 x1 x2’ x2’’ x1’ x1’’ Lower p1 makes good 1 relativelycheaper and causes a substitutionfrom good 2 to good 1.  (x1’,x2’) ? (x1’’,x2’’) is the pure substitution effect. Pure Substitution Effect Is Always Negative! x2 x1 x2’ x2’’ x1’ x1’’ (x1’’,x2’’) must always be on the right-hand-side of (x1’,x2’) by WRSP! And Now The Income Effect x2 x1 x2’ x2’’ x1’ x1’’ (x1’’’,x2’’’) And Now The Income Effect x2 x1 x2’ x2’’ x1’ x1’’ (x1’’’,x2’’’) The income effect is  (x1’’,x2’’) ? (x1’’’,x2’’’). The Overall Change in Demand x2 x1 x2’ x2’’ x1’ x1’’ (x1’’’,x2’’’) The change to demand due to lower p1 is the sum of the income and substitution effects, (x1’,x2’) ? (x1’’’,x2’’’). Question: What is the Contribution of Slutsky?Answer:1) A nice way to