1. Lectures in Microeconomics-Charles W. Upton Slutsky Equation

2. SLutsky Equation The Slutsky Equation These effects are often summarized in the Slutsky equation

3. SLutsky Equation The Slutsky Equation

4. SLutsky Equation The Slutsky Equation The substitution effect is the change in demand from a movement along the indifference curve.

5. SLutsky Equation The Slutsky Equation The income effect is the change in demand from the effective increase in income

6. SLutsky Equation A Caution The version of the Slutsky equation we use is only an approximation.

7. SLutsky Equation A Caution The version of the Slutsky equation we use is only an approximation. We are assuming discrete changes in price and income; the correct equation assumes infinitesimal changes.

8. SLutsky Equation Why spend time on this topic? Giffin Goods

9. SLutsky Equation Why spend time on this topic? Giffin Goods The Demand for Leisure

10. SLutsky Equation Why spend time on this topic? Giffin Goods The Demand for Leisure –As wage rates increase, the cost of an hour of leisure increases –Demand goes up because the income effect dominates the substitution effect.

11. SLutsky Equation Why spend time on this topic? Giffin Goods The Demand for Leisure Different Slopes.

12. SLutsky Equation Why spend time on this topic? Giffin Goods The Demand for Leisure Different Slopes –Changes in the price of one brand versus changes in the prices of all brands..

13. SLutsky Equation Why spend time on this topic? Giffin Goods The Demand for Leisure Different Slopes –Changes in the price of one brand versus changes in the prices of all brands. –Heavily purchased goods versus lightly purchased goods.

14. SLutsky Equation Restating The Slutsky Equation

15. SLutsky Equation The Marshallian Demand Curve

16. SLutsky Equation The Marshallian Demand Curve

17. SLutsky Equation The Hicksian Demand Curve

18. SLutsky Equation The Hicksian Demand Curve

19. SLutsky Equation Sir John Hicks

20. SLutsky Equation Sir John Hicks The Hicksian Demand Curve is the right one to use for consumer surplus calculations, but we generally use the Marshallian one

21. SLutsky Equation Sir John Hicks The Hicksian Demand Curve is the right one to use for consumer surplus calculations, but we generally use the Marshallian one Why? The difference is usually small

22. SLutsky Equation A Demonstration

23. SLutsky Equation Multiplying Through

24. SLutsky Equation The Two Elasticities

25. SLutsky Equation The Elasticity Relationship

26. SLutsky Equation More Manipulation

27. SLutsky Equation The Missing Terms

28. SLutsky Equation The Final Relation

29. SLutsky Equation The Final Relation Unless ω is pretty large, the difference is small

30. SLutsky Equation The Final Relation Unless ω is pretty large, the difference is small Housing Leisure

31. SLutsky Equation End ©2006 Charles W. Upton