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Using the compensating and equivalent variations to define the Slutsky Equation under a discrete price change

Author

Listed:
  • Robert Sproule

    (Bishop's University)

  • Ambrose Leung

    (Bishop's University)

Abstract

In our experience, all textbook presentations of the Slutsky Equation under a discrete price change use a compensation scheme based on the compensating variation. Our students have sensed this convention is arbitrary in that they have asked, why consider this compensation scheme, and not one based on the equivalent variation? The present paper outlines how one might address this matter analytically, and then discusses how our findings provide a new insight into the Giffen Paradox.

Suggested Citation

  • Robert Sproule & Ambrose Leung, 2007. "Using the compensating and equivalent variations to define the Slutsky Equation under a discrete price change," Economics Bulletin, AccessEcon, vol. 4(11), pages 1-9.
    • Handle: RePEc:ebl:ecbull:eb-07d00001
    as

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    File URL: http://www.accessecon.com/pubs/EB/2007/Volume4/EB-07D00001A.pdf
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    References listed on IDEAS

    as
    1. Michael J. Panik, 2002. "Duality and the Geometry of the Income and Substitution Effects," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 1(3), pages 225-233, December.
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    3. Berg, Morten, 1987. "Giffen's Paradox Revisited," Bulletin of Economic Research, Wiley Blackwell, vol. 39(1), pages 79-89, January.
    4. Peter C. Dooley, 1983. "Slutsky's Equation is Pareto's Solution," History of Political Economy, Duke University Press, vol. 15(4), pages 513-517, Winter.
    5. Cornes,Richard, 1992. "Duality and Modern Economics," Cambridge Books, Cambridge University Press, number 9780521336017, July.
    6. Peter C. Dooley, 1983. "Consumer's Surplus: Marshall and His Critics," Canadian Journal of Economics, Canadian Economics Association, vol. 16(1), pages 26-38, February.
    7. Dougan, William R, 1982. "Giffen Goods and the Law of Demand," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 809-815, August.
    8. Christian Weber, 2002. "Linearity, Slutsky symmetry, and a conjecture of Hicks," Economics Bulletin, AccessEcon, vol. 4(12), pages 1-5.
    9. repec:ebl:ecbull:v:4:y:2002:i:12:p:1-5 is not listed on IDEAS
    10. Christian Weber, 2002. "Did Pareto discover income and substitution effects? On an interpretation suggested by Hutchison," Economics Bulletin, AccessEcon, vol. 2(2), pages 1-6.
    11. John S. Chipman & Jean-Sébastien Lenfant, 2002. "Slutsky's 1915 Article: How It Came to Be Found and Interpreted," History of Political Economy, Duke University Press, vol. 34(3), pages 553-597, Fall.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Haradhan Kumar Mohajan, 2017. "Analysis of Reciprocity and Substitution Theorems, and Slutsky Equation," Noble International Journal of Economics and Financial Research, Noble Academic Publsiher, vol. 2(3), pages 54-75, March.

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    More about this item

    Keywords

    Compensating Variation;

    JEL classification:

    • D0 - Microeconomics - - General
    • A2 - General Economics and Teaching - - Economic Education and Teaching of Economics

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