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1、Chapter Eight,Slutsky Equation,Effects of a Price Change,What happens when a commoditys price decreases? Substitution effect (替代效应）: the commodity is relatively cheaper, so consumers substitute it for now relatively more expensive other commodities.,Effects of a Price Change,Income effect （收入效应）: th
2、e consumers budget of $y can purchase more than before, as if the consumers income rose, with consequent income effects on quantities demanded.,Effects of a Price Change,x2,x1,Original choice,Consumers budget is $y.,Effects of a Price Change,x1,Lower price for commodity 1 pivots the constraint outwa
3、rds.,Consumers budget is $y.,x2,Effects of a Price Change,x1,Lower price for commodity 1 pivots the constraint outwards.,Consumers budget is $y.,x2,Now only $y are needed to buy the original bundle at the new prices, as if the consumers income has increased by $y - $y.,Effects of a Price Change,Chan
4、ges to quantities demanded due to this extra income are the income effect of the price change.,Effects of a Price Change,Slutsky discovered that changes to demand from a price change are always the sum of a pure substitution effect and an income effect.,Real Income Changes,Slutsky asserted that if,
5、at the new prices, less income is needed to buy the original bundle then “real income” is increased more income is needed to buy the original bundle then “real income” is decreased,Real Income Changes,x1,x2,Original budget constraint and choice,Real Income Changes,x1,x2,Original budget constraint an
6、d choice,New budget constraint,Real Income Changes,x1,x2,Original budget constraint and choice,New budget constraint; real income has risen,Real Income Changes,x1,x2,Original budget constraint and choice,Real Income Changes,x1,x2,Original budget constraint and choice,New budget constraint,Real Incom
7、e Changes,x1,x2,Original budget constraint and choice,New budget constraint; real income has fallen,Pure Substitution Effect,Slutsky isolated the change in demand due only to the change in relative prices by asking “What is the change in demand when the consumers income is adjusted so that, at the n
8、ew prices, she can only just buy the original bundle?” Use WARP,Pure Substitution Effect Only,x2,x1,x2,x1,Pure Substitution Effect Only,x2,x1,x2,x1,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,Pure Substitut
9、ion Effect Only,x2,x1,x2,x2,x1,x1,Lower p1 makes good 1 relatively cheaper and causes a substitution from good 2 to good 1.,Pure Substitution Effect Only,x2,x1,x2,x2,x1,x1,Lower p1 makes good 1 relatively cheaper and causes a substitution from good 2 to good 1. (x1,x2) (x1,x2) is the pure substituti
10、on effect.,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,
11、x2) (x1,x2).,Slutskys 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 goods own price changes.,Slutskys Effects for Normal Goods,x2,x1,x2,x2,x1,x1,(x1,x2),Good 1 is normal because higher income
12、 increases demand,x2,x1,x2,x2,x1,x1,(x1,x2),Good 1 is normal because higher income increases demand, so the income and substitution effects reinforce each other.,Slutskys Effects for Normal Goods,Since both the substitution and income effects increase demand when own-price falls, a normal goods ordi
13、nary demand curve slopes down. The Law of Downward-Sloping Demand therefore always applies to normal goods.,Slutskys Effects for Normal Goods,Slutskys Effects for Income-Inferior Goods,Some goods are income-inferior (i.e. demand is reduced by higher income). The substitution and income effects oppos
14、e each other when an income-inferior goods own price changes.,Slutskys Effects for Income-Inferior Goods,x2,x1,x2,x1,Slutskys Effects for Income-Inferior Goods,x2,x1,x2,x1,Slutskys Effects for Income-Inferior Goods,x2,x1,x2,x1,Slutskys Effects for Income-Inferior Goods,x2,x1,x2,x2,x1,x1,Slutskys Effects for Income-Inferior Goods,x2,x1,x2,x2,x1,x1,The pure substitution effect is as for a normal good. But, .,Slutskys Effects for Income-Inferior Goods,x2,x1,x2,x2,x1,x1,
