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- Title
The Substitution Term is Ambiguous.
- Authors
Hadar, Josef
- Abstract
This article focuses on price-compensated substitution terms. The reason why the effect of a compensated price change can indeed be ambiguous is that the change in quantity demanded depends on the method by which the consumer's real income is held constant. Under the Slutsky method the compensation is effected through an appropriate change in the consumer's income; but an equally effective method is to couple the price change under consideration with a compensatory change in some other price. The question whether the range of applicability of price-compensated price changes is wider or narrower than that of income-compensated price changes may not have an obvious answer; certainly, there is no a priori reason to rule them out. Unfortunately, the price-compensated substitution terms do not seem to yield any interesting hypotheses, and therefore their inclusion in the standard body of consumer behaviour theory may not enrich the latter a great deal. If nothing else, the results indicate that if we were to generalize the notion of the substitution effect by admitting methods of compensation other than changes in income, then the law of demand may not hold. Thus, it is clear that statements such as the quantity demanded of a good falls whenever its price rises, provided real income is held constant, are generally false; they are true only if one specifies that price changes are compensated by changes in income. It is the lack of such a specification that makes the substitution term ambiguous.
- Subjects
PRICES; SUBSTITUTION (Economics); ECONOMIC demand; WAGES; INCOME; CONSUMER behavior
- Publication
Economica, 1967, Vol 34, Issue 136, p428
- ISSN
0013-0427
- Publication type
Article
- DOI
10.2307/2552095