Microeconomics is a vast field of study that includes several theories related to the wants and needs of people. An important aspect involves defining ‘compensated demand’, which further isolates the substitution effect.
Hicks and Slutsky are two approaches that do so. Understanding them can be quite challenging, but the difference between them helps paint a clear picture.
Key Takeaways
- Hicks’ substitution effect eliminates income effects, while Slutsky’s substitution effect considers both income and substitution effects.
- Hicks’ method uses compensating variation to analyze consumer behavior, whereas Slutsky’s relies on equivalent variation.
- Hicks’ approach results in a lower demand curve slope, while Slutsky’s approach yields a higher slope for the demand curve.
Hicks vs Slutsky
Hicks Demand Function is a microeconomics theory that was named after John Richard Hicks, and it is also called Compensated Demand. It looks at the reduction and satisfaction of money and demand. Slutsky Demand Function is also called Slutsky and it is an equation on the price of commodities and demand.
The Hicks Demand Function, named after John Richard Hicks, is a popular microeconomics theory that is also called Compensated Demand Function.
It defines a situation when a consumer demands a bundle of goods that causes a reduction in the money they spend while the satisfaction derived from the goods remains the same.
The Slutsky Demand Function is named after the famous Russian economist Eugen Slutsky. It is also called Slutsky Identity.
The equation states that there is a change in demand as the price of commodities changes, while the satisfaction derived from them remains the same. It gives rise to the substation effect as well as the income effect.
Comparison Table
| Parameters of Comparison | Hicks | Slutsky |
|---|---|---|
| Definition | Hicks proposes a demand curve that expresses the demand for consumption bundles. | Slutsky proposes a demand curve for the change in demand for consumption bundles. |
| Economist | The Hicks demand function was named after John Richard Hicks. | The Slutsky Demand Function is named after the famous Russian economist, Eugen Slutsky. |
| Alternative Name | Hicks demand function is also called compensated demand function. | Slutsky demand function is also called Slutsky identity. |
| Use | Hicks derives a solution to reduce expenditure on commodity bundles. | Slutsky relates the changes from uncompensated to compensated demand. |
| Effects | Hicks gives rise to the income and substation effects. | Slutsky is the result of income and substation effects. |
What is Hicks?
Hicks is a demand function in microeconomics that is also called compensated demand function. It refers to a quantity demanded for a good while a maximum reduction in the amount of money spent on it.
This is done while the amount of satisfaction derived from the commodity remains the same. The function is named after the popular economist John Richard Hicks.
The demand function is used to isolate the effect that relative prices of commodities have on the quantity that has been demanded.
It is also quite useful to be applied for mathematical manipulations for the reason that the wealth or income of the consumer need not be represented.
When the Hicks demand function is applied in a certain situation, it gives rise to two effects – the substitution effect and the income effect.
The substitution effect refers to the change in the quantity of the demanded good that arises due to a change in price. This modifies the slope that defines budget constraints however, the utility derived from the good remains the same throughout.
Meanwhile, the income effect is related to the change in quantity demanded because of the consumer’s total buying power. When the purchasing power of a consumer falls, the income effect gives rise to the substitution effect.
What is Slutsky?
The Slutsky Demand function, also called Slutsky Identity, was named after the famous Russian economist Eugen Slutsky. The equation defines the changes that occur when uncompensated demand changes to compensated demand.
This takes place when the satisfaction derived from the commodity remains the same throughout. The Slutsky equation is one that is used most commonly by various economists.
Using the Slutsky equation is quite advantageous as it makes it easier to calculate the amount of income that is equal to the cost difference. By assessing this, the income of the consumer is adjusted.
This is dependent on observable market data. The Slutsky approach is a result of the separation of the income effect from the substitution effect.
However, the substitution effect that is derived includes a certain amount of gain in the consumer’s income. An important aspect of the Slutsky demand function is that as the quantity of the demanded commodity reduces, the income effect reduces as well.
This means that if the quantity of demanded goods is small, then the income effect automatically becomes very close to insignificant.
Moreover, when the commodity is a normal good, a reduction in its price results in an increase in the amount of goods demanded. This is due to both income and substitution effects.
Main Differences Between Hicks and Slutsky
- Hicks proposes a demand curve that expresses the demand for consumption bundles, whereas Slutsky proposes a demand curve for the change in demand for consumption bundles.
- Hicks demand function was named after John Richard Hicks, whereas Slutsky demand function was named after Eugen Slutsky.
- Hicks demand function is also called compensated demand function, whereas the alternative name for Slutsky demand function is Slutsky Identity.
- Hicks derives a solution to reduce expenditure on commodity bundles, whereas Slutsky relates the changes from uncompensated to compensated demand.
- Hicks gives rise to the income and substation effects, whereas Slutsky is a result of both the effects.
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