Slutsky Equation Derivation| Income and Substitution Effect | Intermediate Microeconomics by Varian

This video provides a summary of Chapter 8 -Slutsky Equation from Intermediate Microeconomics by HL Varian.
The content of this video is relevant for all economics learners, especially university curriculum those preparing for NTA NET- Economics, GATE Economics, UPSC, RBI GRADE B , IGIDR, JNU, and other key professional entrance exams.

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Summary:
1. When the price of a good decreases, there will be two effects on consumption. The change in relative prices makes the consumer want to consume more of the cheaper good. The increase in purchasing power due to the lower price may increase or decrease consumption, depending on whether the good is a normal good or an inferior good.
2. The change in demand due to the change in relative prices is called the substitution effect; the change due to the change in purchasing power is called the income effect.
3. The substitution effect is how demand changes when prices change and purchasing power is held constant, in the sense that the original bundle remains affordable. To hold real purchasing power constant, money income will have to change. The necessary change in money income is given by Δm = x1Δp1.
4. The Slutsky equation says that the total change in demand is the sum of the substitution effect and the income effect.
5. The Law of Demand says that normal goods must have downward sloping demand curves


Outline:

1:06 Why we study this approach or How is it useful?
2:43 Effects of a Price Change
9:00 Real Income changes
15:12 Pure Substitution Effect
19:30 Income Effect
20:58 Overall Changes in Demand
23:19 Slutsky Effect for Normal goods, Income-inferior goods and Giffen goods
31:42 Derivation and Proof of Slutsky Equation using Calculus
40:01 Summary

Chapter -1 Markets - Intermediate Microeconomics by for University, UPSC NTA RBI GRADE B DEPR , IGIDR like exams

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In this video, we cover all the concepts from Hal R Varian Chapter 1 - The Market - Intermediate Microeconomic Theory.

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