Slutsky Equation

When the price of a good changes, there are two effects in action:

The substitution effect: the rate at which you can exchange a good for another good; and the income effect: the alteration of the purchasing power of your income. These two effects are characterized the pivot and shift motions of the budget line for the two goods. The Slutsky equation essentially states that the total change in demand is equal to the substitution effect plus the income effect.

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