Slutsky's Theorem

Discipline: Economics

Named after its proposer, Soviet economist Eugen (Evgeny) Slutsky (1880-1948), Slutsky's theorem was later developed by English economists John Hicks (1904-1989) and ROY ALLEN (1906-1983).

In its simplest form:

Price effect = income effect + substitution effect

Slutsky asserted in 1915 that demand theory is based on the concept of ordinal utility.

This idea was developed by Hicks who separated the consumer's reaction to a price change into income and substitution effects.

Source:
E Slutsky, 'On the Theory of the Budget of the Consumer', Readings in Price Theory, K E Bould-ing and G J Stigler, eds (1953)

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