<p>That's actually just a convention. While these two methods to partition the total effect lead to different results for any discrete price change, they coincide in the limit of an infinitesimal price change.</p>

CC BY-SA 4.0
2021-12-17T15:25:13.143Z
Are you writing about Slutsky decomposition here? If yes, what two methods? I seem to have lost the thread.
Giskard
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2021-12-20T08:43:52.230Z
@Giskard, I was actually referring to this problem https://economics.stackexchange.com/questions/417/ambiguous-definition-of-substitution-and-income-effect
VARulle
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2021-12-17T08:50:02.010Z
2021-12-17T08:50:02.010Z
VARulle
<p>Starting from the initial consumption bundle, first the substitution effect is calculated, then the income effect. Why not the other way around?</p>
<p>My guess would be, because with increasing utility the shape of the utility level curve might change, the substitute effect would differ not just proportionally, while there is no such problem with income effect. However, I don't see why the initial utility level curve is preferred to the new one.</p>
<p>One could argue, that the initial utility curve is unrepresentative, because it doesn't represent the current situation.</p>

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2021-12-17T17:01:54.583Z
Hi! It seems to me that in case of Slutsky (or Hicks) decomposition, what you actually calculate are three consumption bundles. The pre price change choice $(A)$, the post price change choice $(C)$, and the income compensated choice given the new price $(B)$. Once you have these three bundles, you can freely calculate the income $(x_1^C - x_1^B)$ and substitution $(x_1^B - x_1^A)$ effects in the order you want? Do I misunderstand your question?
Giskard
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2021-12-18T07:43:00.127Z
Hey! I was talking about taking point B as the choice with the old price and the income adjusted (reduced if prices rise) so as to be on the new indifference curve. But as you put it this way, income compensated sounds to have a better meaning
Nick The Dick
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2021-12-18T09:28:17.667Z
Okay, but is anything stopping you from calculating $x_1^B - x_1^A$ before calculating $x_1^C - x_1^B$?
Giskard
<microeconomics>
Why is the substitution effect calculated before the income effect?
Nick The Dick
# Why is the substitution effect calculated before the income effect?

(Asked by: username_0 on 2021-12-16)

Starting from the initial consumption bundle, first the substitution effect is calculated, then the income effect. Why not the other way around?

My guess would be, because with increasing utility the shape of the utility level curve might change, the substitute effect would differ not just proportionally, while there is no such problem with income effect. However, I don't see why the initial utility level curve is preferred to the new one.

One could argue, that the initial utility curve is unrepresentative, because it doesn't represent the current situation.

**Tags:** microeconomics
> **Comments:**
> **username_1**: Hi! It seems to me that in case of Slutsky (or Hicks) decomposition, what you actually calculate are three consumption bundles. The pre price change choice $(A)$, the post price change choice $(C)$, and the income compensated choice given the new price $(B)$. Once you have these three bundles, you can freely calculate the income $(x_1^C - x_1^B)$ and substitution $(x_1^B - x_1^A)$ effects in the order you want? Do I misunderstand your question?  
> **username_0**: Hey! I was talking about taking point B as the choice with the old price and the income adjusted (reduced if prices rise) so as to be on the new indifference curve. But as you put it this way, income compensated sounds to have a better meaning  
> **username_1**: Okay, but is anything stopping you from calculating $x_1^B - x_1^A$ before calculating $x_1^C - x_1^B$?  

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## 1 answers

### Answer by username_2 on 2021-12-17. Score: 2

That's actually just a convention. While these two methods to partition the total effect lead to different results for any discrete price change, they coincide in the limit of an infinitesimal price change.

> **Comments:**
> **username_1**: Are you writing about Slutsky decomposition here? If yes, what two methods? I seem to have lost the thread.  
> **username_2**: @Giskard, I was actually referring to this problem https://economics.stackexchange.com/questions/417/ambiguous-definition-of-substitution-and-income-effect  

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