The Slutsky Equation describes how the demand for a good changes in response to a change in its price, taking into account both the substitution effect and the income effect. It can be mathematically expressed as:
where is the quantity demanded of good , is the price of good , is the Hicksian demand (compensated demand), and is income. The equation breaks down the total effect of a price change into two components:
This concept is crucial in consumer theory as it helps to analyze consumer behavior and the overall market demand under varying conditions.
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