Slutsky equation

The Slutsky equation is a result in microeconomic consumer theory, named after the economist and mathematician Eugen Slutsky, that relates the change in Marshallian, or uncompensated, demand for a good to changes in Hicksian, or compensated, demand, where compensated demand is calculated so as to hold a consumer's utility fixed. The equation decomposes the total change in the quantity of a good demanded after a price change into two parts: a substitution effect, the change from consumers substituting toward or away from a good purely because its price relative to other goods has shifted while utility is held constant, and an income effect, the change from the price shift altering how much real purchasing power the consumer has. Because these two effects can reinforce or oppose each other depending on whether a good is a normal or an inferior good, the Slutsky equation explains why consumer demand for different goods can respond differently, sometimes counterintuitively, to the same price change. This description is adapted from Wikipedia contributors under CC BY-SA 4.0; changes were made. https://creativecommons.org/licenses/by-sa/4.0/