Microeconomics Term 1

,Optimising Graphically : Hicksian and Slutsky Substitution Effect

substitution effect demand of price
:
change in
sorely because



Hicksian

utility is kept constant

↳ consume on same IC curve




Normal Good Because
utility is held constant
,
as well as

real income so that the substitution
É
→É
'



Ii effet can be evaluated Now find .
at the




1
.




new price ratio , the cheapest way of

achieving IC , so that we are compensating
"
•
A C A
"
•
C
, • •
;
,
the consumer , (adjusting BC to keep real income
I
→ , I
¥1 con stent In this case since -6 to keep
i
i. i ,
: .
price ,


! Bci Bci
> apple ! ! BC
:
Bc ,
apple
real income constant BC has to shift
> ,

z-•✗É
.



✗ ✗
z ✗e - ✗
↳ incomeHeit inward . Slope of
adjusted BC = slope of BC ,
total Effect because they both have same price ratio
total effect

←→
( minimising expenditure
substitution effect

,Slutsky
purchasing power is kept constant

compensated BC will
pass through the original bundle




IC ,


Il
I don't understand how
a
we
get to

b.
point

A qc
p


i :B :
1 ! 1


I '
l

i. BC i
.
BC ,

✗2
✗← ✗ i ←
inc
sub


¥1T

, While the total Effect is the same for both compensating methods, the individual

effects are different ; because different variables are
being held constant .




It
Compensated Budget line is tangential to IC in
,
but goes through Bundle A in 5

: compensation is different




Deriving Demand (Don't really understand this)




Hicksian Demand

Slutsky Demand
} consider
only substitution effect




marshallion Demand } considers income + substitution effect




Normal




•
A



DM

DH

DS