The Slutsky equation, named after Soviet economist Eugen Slutsky, is an equation used in microeconomics to analyze how changes in the price of a good affect the quantity of that good consumed, taking into account the income and substitution effects.
The Slutsky equation can be written as follows:
∆x/∆p = ∆xd/∆p + ∆xs/∆p
Where: ∆x represents the change in the quantity of the good consumed, ∆p represents the change in the price of the good, ∆xd represents the income effect (the change in consumption due to changes in purchasing power), ∆xs represents the substitution effect (the change in consumption due to changes in relative prices).
The Slutsky equation helps economists understand the impact of price changes on consumer behavior. It is commonly used in consumer theory to analyze how individuals allocate their spending between different goods and services in response to changes in prices and other economic factors.
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