Hicks vs Slutsky

People have different wants and needs. Wants and needs are two different terms. You can live without wants, but you can’t live without needs. Food is a need; however, it becomes a want if you desire  food that you really don’t have to eat.

Since the world is a tempting place, the more we want to have things. We don’t focus much on our needs; instead, we focus on our wants. With that, the demand for several products has increased. We belong to a tech savvy world. Previously, when you owned a computer, you were one of the elites. However, almost every person has his own computer at home. Having a computer is no big thing these days. It will only be the talk of the town if you buy a very expensive brand of computers.

Because PCs are in great demand in our society, prices of computers have risen. However, since people are searching for cheaper brands, the prices of computers have also decreased. The price depends on the people’s wants. This also compares to holidays. For example, when Christmas is near, the prices for fruits, hams, and pastas increase. The manufacturers are taking advantage of the holiday season because they know that many people will buy these foods because it’s Christmas. If it isn’t the holiday season anymore, the prices will drop. That is why our mothers begin their Christmas food buying when the “–ber” months enter the calendar. Our mothers are very wise because they know that the prices of hams and pastas are still low when December is not yet around.

Several microeconomics theories and functions are able to explain the situation. Some of these are the Hicks demand function and the Slutsky Equation. The differences between Hicks and Slutsky are the following.

Hicks Demand Function

The Hicks Demand Function is otherwise known as the Compensated Demand Function. This is named after John Richard Hicks. He was an economist of British origin, and he was considered to be one of the most influential economists that had great contributions during the 20th century.

According to Wikipedia, “a Hicksian demand correspondence is the demand of a consumer over a bundle of goods that minimizes their expenditure while delivering a fixed level of a utility.” While Hicksian demand functions are handy tools for mathematical operations because there is no need to represent one’s income or wealth.

Hicksian demand functions are connected to the Marshallian demand functions which are then fundamentally related by the Slutsky equation. Marshallian demand functions originated from the Utility Maximization Problem while Hicksian demand functions come from the Expenditure Minimization Problem. Hicksian demand functions are closely related to expenditure functions.

Slutsky Equation

The Slutsky Equation is also termed as the Slutsky Identity. This microeconomic equation was named after Eugen Slutsky. Eugen Slutsky was a known Russian economist, statistician, and political economist. The Slutsky Equation shows the relative changes between the Marshallian demand and the Hicksian demand functions.

This equation shows that the demand changes because of price changes. It has two effects; the substitution effect and income effect. The substitution effect occurs because of the exchange rate between two goods. The income effect occurs as a result of a change in the consumer’s ability to purchase. The substitution effect is always negative while the income effect can either be positive or negative.

Summary:

1. The demand changes based on the consumer’s preferences, their income, and the price of goods.

2. Hicks Demand Function is otherwise known as the Compensated Demand Function. This is named after John Richard Hicks.

3. The Slutsky Equation is also termed as the Slutsky Identity. This microeconomic equation is named after Eugen Slutsky.

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