### Abstract

It is only the Slutsky equation that has been universally used to examine how the demand for a good responds to variations in its own price. This paper proposes an alternative to the Slutsky equation. It decomposes such a price effect into the “ratio effect” and the “unit-elasticity effect”. The “ratio effect” is positive (negative) if the expenditure spent on a good under consideration increases (decreases) when its own price rises, and it can be divided further into the familiar substitution effect and the “transfer effect” which reflects the income effect of other goods. The “unit-elasticity effect,” which is always negative, stands for unitary price elasticity of demand. It is also shown that the new method can be used for the analysis of the cross-price effect with and without initial endowments. The Slutsky equation and the new one are “complements”, but graphical representations as well as examples of the applications reveal that the latter is much easier to understand intuitively.

Original language | English |
---|---|

Pages (from-to) | 253-280 |

Number of pages | 28 |

Journal | Italian Economic Journal |

Volume | 2 |

Issue number | 2 |

DOIs | |

Publication status | Published - 2016 Jul 1 |

### Fingerprint

### Keywords

- Price effect
- Ratio effect
- The Slutsky equation
- Unit-elasticity effect

### ASJC Scopus subject areas

- Economics, Econometrics and Finance(all)

### Cite this

**Slutsky Revisited : A New Decomposition of the Price Effect.** / Sasakura, Kazuyuki.

Research output: Contribution to journal › Article

*Italian Economic Journal*, vol. 2, no. 2, pp. 253-280. https://doi.org/10.1007/s40797-016-0034-y

}

TY - JOUR

T1 - Slutsky Revisited

T2 - A New Decomposition of the Price Effect

AU - Sasakura, Kazuyuki

PY - 2016/7/1

Y1 - 2016/7/1

N2 - It is only the Slutsky equation that has been universally used to examine how the demand for a good responds to variations in its own price. This paper proposes an alternative to the Slutsky equation. It decomposes such a price effect into the “ratio effect” and the “unit-elasticity effect”. The “ratio effect” is positive (negative) if the expenditure spent on a good under consideration increases (decreases) when its own price rises, and it can be divided further into the familiar substitution effect and the “transfer effect” which reflects the income effect of other goods. The “unit-elasticity effect,” which is always negative, stands for unitary price elasticity of demand. It is also shown that the new method can be used for the analysis of the cross-price effect with and without initial endowments. The Slutsky equation and the new one are “complements”, but graphical representations as well as examples of the applications reveal that the latter is much easier to understand intuitively.

AB - It is only the Slutsky equation that has been universally used to examine how the demand for a good responds to variations in its own price. This paper proposes an alternative to the Slutsky equation. It decomposes such a price effect into the “ratio effect” and the “unit-elasticity effect”. The “ratio effect” is positive (negative) if the expenditure spent on a good under consideration increases (decreases) when its own price rises, and it can be divided further into the familiar substitution effect and the “transfer effect” which reflects the income effect of other goods. The “unit-elasticity effect,” which is always negative, stands for unitary price elasticity of demand. It is also shown that the new method can be used for the analysis of the cross-price effect with and without initial endowments. The Slutsky equation and the new one are “complements”, but graphical representations as well as examples of the applications reveal that the latter is much easier to understand intuitively.

KW - Price effect

KW - Ratio effect

KW - The Slutsky equation

KW - Unit-elasticity effect

UR - http://www.scopus.com/inward/record.url?scp=85031401898&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=85031401898&partnerID=8YFLogxK

U2 - 10.1007/s40797-016-0034-y

DO - 10.1007/s40797-016-0034-y

M3 - Article

AN - SCOPUS:85031401898

VL - 2

SP - 253

EP - 280

JO - Italian Economic Journal

JF - Italian Economic Journal

SN - 2199-322X

IS - 2

ER -