The Slutsky equation (or Slutsky identity) in economics, named after Eugen Slutsky (1880-1948), relates changes in Marshallian demand to changes in Hicksian demand. It demonstrates that demand changes due to price changes are a result of two effects:
a substitution effect, the result of a change in the exchange rate between two goods; and
an income effect, the effect of price results in a change of the consumer's purchasing power.
Each element of the Slutsky matrix is given by
where h(p,u) is the Hicksian demand and x(p,w) is the Marshallian demand, at price level p, wealth level w, and utility level u. The first term represents the substitution effect, and the second term represents the income effect.
The same equation can be rewritten in matrix form and is called the Slutsky matrix
where Dp is the derivative operator with respect to price and Dw is the derivative operator with respect to wealth.
