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There are two parts of the Slutsky equation, namely the substitution effect and income effect. In general, the substitution effect is negative. Slutsky derived this formula to explore a consumer's response as the price of a commodity changes. When the price increases, the budget set moves inward, which also causes the quantity demanded to decrease.
The Hicksian demand function isolates the substitution effect by supposing the consumer is compensated with exactly enough extra income after the price rise to purchase some bundle on the same indifference curve. [2] If the Hicksian demand function is steeper than the Marshallian demand, the good is a normal good; otherwise, the good is inferior.
The substitution effect is the change that would occur if the consumer were required to remain on the original indifference curve; this is the move from A to B. The income effect is the simultaneous move from B to C that occurs because the lower price of one good in fact allows movement to a higher indifference curve.
The substitution effect says that if the demand for both goods is homogeneous, when the price of one good decreases (holding the price of the other good constant) the consumer will consume more of this good and less of the other as it becomes relatively cheeper. The same goes if the price of one good increases, consumers will buy less of that ...
The book decomposes the change into the substitution effect and the income effect. The latter is the change in real income in theoretical terms without which the distinction between real and nominal values would be more problematic.
It is also possible that the Hicksian and Marshallian demands are not unique (i.e. there is more than one commodity bundle that satisfies the expenditure minimization problem); then the demand is a correspondence, and not a function.
When other factors of production can be easily substituted for the category of labor (substitution effect). When the supply of other factors of production is highly elastic (that is, usage of other factors of production can be increased without substantially increasing their prices) (substitution effect). That is, employers can easily replace ...
The expenditure function is the inverse of the indirect utility function when the prices are kept constant. I.e, for every price vector and income level : [1]: 106 (, (,))