In Quest of the Slutsky Diamond

Olivier de La Grandville

American Economic Review, 1989, vol. 79, issue 3, 468-81

Abstract: The Slutsky equation can be constructed as a parallelogram (a diamond), the area of which is proportional to the elasticity of substitution. This construction permits to show immediately that demand functions become concave on an interval if the elasticity of substitution increases sufficiently. Also, the diamond sheds light on the fact that the production level increases with the elasticity of substitution. As an application, the author shows that the elasticity of substitution has a direct bearing not only on the rate of growth of an economy, but also on the very existence of sustained growth. Copyright 1989 by American Economic Association.

Date: 1989
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