Question

(a) Distinguish between substitution effect and Income effect. Make a comparison with illustration between Slusky’s approach and Hicksian approach to decompose the price effect into substitution effect and income effect. 

06 Jul 2022
Answer :
Word Count : 686

The income effect expresses the impact of increased purchasing power on consumption, while the substitution effect describes how consumption is impacted by changing relative income and prices.

These economic concepts concern changes in the market and how they impact consumption patterns for consumer goods and services.

Different goods and services are affected by these changes in the market in different ways. Some products, called inferior goods, generally are purchased less whenever incomes increase. Consumer spending on normal goods typically increases with higher purchasing power, which is in contrast with inferior goods.

The Hicksian Method

Let us look at J.R. Hicks’ method of bifurcating income effect and substitution effect.​​​​​​​​​​​​​​the-hicksian-method-and-the-slutskian-method

 

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