The Hicksian Decomposition is an economic concept used to analyze how changes in prices affect consumer behavior, separating the effects of price changes into two distinct components: the substitution effect and the income effect. This approach is named after the economist Sir John Hicks, who contributed significantly to consumer theory.
Mathematically, if the price of a good changes from to , the Hicksian decomposition allows us to express the total effect on quantity demanded as:
By using this decomposition, economists can better understand how price changes influence consumer choice and derive insights into market dynamics.
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