11a. The Slutsky Equation and Demand Curves

In this video, I offer a derivation of the Slutsky Equation (an equation that decomposes the Marshallian demand curve's price effect into income and substitution effects). The video intuitively motivates the Slutsky Identity by relating the utility maximization problem to the expenditure minimization problem.

For a list of links to videos on this channel (organized by topic), check out my video web page:

http://blog.thisyoungeconomist.com/p/learn-microeconomics.html

Category:

Education

Tags:

• Hicksian demands
• Marshallian demands
• Slutsky equation
• calculus-based economics
• microeconomics lectures
• economics lectures
• compensated demand
• uncompensated demand
• tutorial
• educational

[kennyry1]

@intromediateecon: Thanks for answering that for me, and thanks for the videos, they're great. Just one other question. I don't see how your application of Shephard's Lemma works. I took your advice and had a look at the wikipedia page, and it says that Shephard's result was that de/dp1 (which I presume is dC/dp1 in your notation) = the Hicksian (not the marshallian) demand. I don't see how adding the Marshallian demand to this, as your subtitle says, gets you to the Marshallian demand?

[intromediateecon]

@kennyry1 The whole identity is predicated on the fact that Xh = Xm. I bundled two steps into one at 4:54. Step 1: Apply Shephard's Lemma to get dC/dpx = Xh... Step 2: Use the fact that Xh = Xm in this derivation.

[kennyry1]

Why is this called the Slutsky Equation when it depends on the Hicks-Allen (rather than Slutsky) substitution effect?

[intromediateecon]

@kennyry1 Slutsky compensation (giving the consumer enough after a price increase to allow him to afford his old bundle) and Hicks compensation (giving the consumer enough after a price increase to allow him to be indifferent to the change and his old bundle) are different, but for small price changes, they approach each other.

Because Slutsky used Slutsky compensation to get the original Slutsky equation, we call it the Slutsky equation. Hicks came later with the way we now think about it.

[Oscargs7]

Where did you study economy?

[intromediateecon]

@Oscargs7 Montana State University and University of Chicago

[tolgochka]

If it's possible to switched on the sound and make the full video how do you make the calculations to undertand it better.

[charliefasurf1000]

@weeloo1234 oh dear, I just lost my faith in higher education - even shiny LSE... Anyway thanks @intromediateecon from Arhus School of Business (Denmark) students'

[1SAROAA]

thankyou very much our lecturer doesnt make it easy like you.

[dabestplayer]

creepy smile at the beginning

[weeloo1234]

Second year undergraduate Economic History students at the LSE that you :))) You are better than our lecturer! You should apply here!

[leoyn]

God bless you!



[bryanj12341]

this helped me on my econ final, thanks much

[kennyry1]

@intromediateecon: Ah...of course, thanks for that, just wasn't seeing it for some reason. Thanks for your help.