In calculus notation, this decomposition can be represented as follows:

This equation is known as the Slutsky equation. The first term to the right of the equal sign is the substitution effect, where utility is held constant. The second term is the income effect, where prices are held constant, and X is the amount of the good consumed prior to the price change.

Transcribed Image Text:

XP dP dX| dP dX| - X- dPF