Income and Substitution Effects

Hicksian Income Effect vs Substitution Effect

These vital microeconomic concepts are explained with graphs below. The Hicksian income and substitution effect of a price change and different from the Slutsky income and substitution effects because Hicks defined real income as utility, meaning that he drew the imaginary budget constraint to be tangent to the original indifference curve (meaning that the consumer is equally well off). This is shown below. Slutsky analysis involves drawing the imaginary budget constraint back to the original bundle, and shall be explained in a different resource. Now practise with this substitution and income effects worksheet.

Under: Macroeconomics