Let x(p, w) be Walras's demand, u? *? For consumers, under the premise that price P and income W affect the level, then

Slatsky equation shows that the total effect (TE) of price changes on consumption is equal to the sum of substitution effect (SE) and income effect (IE).

Economic significance: The function of Lousqui equation is that it can decompose the demand change of a commodity caused by price change, how much is caused by substitution effect and how much is caused by income effect.

Extended data

The rise in the price of a commodity may have two effects: on the one hand, it makes the commodity more expensive than its substitute, which will lead consumers to reduce their consumption of the commodity and increase their consumption of its substitute;

On the other hand, it makes consumers' real income (or purchasing power) decline, which will also lead consumers to reduce (or increase) their consumption of goods. The former is the substitution effect of price changes, and the latter is the income effect of price changes.

Baidu Encyclopedia-Slatzky