consumer preference theory

1. SLUTSKY’S THEOREM
Presented by
Suparna Pani
Date – 10/5/2015
JainUniversity-MAEconomics2015

2. INTRODUCTION
 When price of something goes down, we buy more of it. This
lead to two effect:
 INCOME EFFECT : it becomes less expensive , we have more
purchasing power
 SUBSTITUTION EFFECT: it offers more utility per unit of
money
 Price effect is the sum of substitution effect and income
effect for a price change which is known as slutsky’s
theorem
JainUniversity-MAEconomics2015
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3. Marshallian
demand
or
Uncompensated
demand curve
Hicksian demand
or
Compensated
demand curve
Slutsky
theorem
1.It deals with how
demand changes
when price changes
holding money
income constant
2.It maximise utlity
given price and
wealth
3.Marshallian demand
is easier to observe
1.It deals with how
demand changes
when price changes
holding the real
income constant or
utility constant
2.It minimise
expenditure
3.Hicksian demand is
more mathematically
tractable
1.It is the total
(Marshallian) price
effect is equal to
the sum of the
substitution effect
(i.e,Hickisan price
effect) plus income
effect. Both
function are related
by slutsky eqation.
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4. MATHEMATICALLY
Its based on derivation of marshallian and hicksian
demand
∂xi⁄ ∂pj = ∂hi/ ∂pi – (xj* (∂xi/ ∂m))
TE SE IE
 Total effect: it shows total quantity of x that we consume
varies when we change price
 Substitution effect: Variation is due to finding similar
product(obtain from derivation of the Hicksian demand with
regard price)
 Income effect: change in our purchasing power affect the
amount we consume of a certain goods(derivation of
Marshallian demand with regard wealth)
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5. GRAPHICALLY
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6. ANALYSIS OF AGGREGATE EFFECT –
DIFFERENT GOODS
Price Substitution
Effect
Income Effect Total Effect =
Substitution
Effect + Income
Effect
Normal good ↓ X _ ↓ X _ ↓X+ ↓ X= ↓X( _)
Inferior good
1.[SE]>[IE]
2.[SE]<[IE]
{Giffen goods}
3.[SE]=[IE]
↓ X _
↓↓ X _
↓ X _
↓ X _
↑ X +
↑ X +
↑↑ X +
↑ X +
↓ X+ ↑ X= X ?
↓ ↓X+ ↑ X=↓ X(_)
↓ X+↑↑ X=↑X(+)
↓ X+ ↑ X=X
Independent good ↓ X _ X:constant
(no income effect)
↓ X+ 0= ↓ X( _)
JainUniversity-MAEconomics2015
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7. THANK YOU
JainUniversity-MAEconomics2015