Slutsky equation

The Slutsky Equation is an important concept in economics that explains how consumers adjust their buying habits when prices change. It shows that when the price of a good increases, consumers will not only buy less of that good (substitution effect) but may also alter their overall spending due to changes in their purchasing power (income effect). Essentially, the Slutsky Equation helps us understand the relationship between price changes, consumer choices, and overall demand, illustrating the balance between substituting goods and responding to changes in income from price variations.