Ch.

8 Slutsky Equation
Giffen good optimal demand for a good decreases when its price falls
Substitution effect(compensated demand) the change in demand is due to the
change in the rate of exchange between the two goods (budget line pivots around
the vertical axis.)
Income effect the change in demand due to having more purchasing power (shift
of budget line)
Slutsky identity the total change in demand equals the substitution effect pus the
income effect
Law of demand if the demand for a good increases when income increases, then
the demand for that good must decrease when its price increases
Hicks substitution effect pivot the budget line around the indifference curve rather
than around the original choice curve. Keeps utility constant rather than purchasing
power and gives the consumer just enough money to get back to the old
indifference curve.
Compensated demand curve also called the hicksian demand curve. Adjusting
income as the price changes so as to keep the consumers utility constant.