Small Income Effects: A Marshallian Theory of Consumer Surplus and Downward Sloping Demand

Xavier Vives

The Review of Economic Studies, 1987, vol. 54, issue 1, 87-103

Abstract: We formalize the Marshallian idea that when the proportion of income spent on any commodity is small then the income effects are small. If n is the number of goods, we show, under certain assumptions on preferences and prices, that the order of magnitude of the norm of the income derivative of demand is 1/√n. As a corollary we get that for the case of a single price change the percentage error in approximating the Hicksian Deadweight Loss by its Marshallian counterpart goes to zero at least at the rate 1/√n and that demand is downward sloping for n large enough.

Date: 1987
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:54:y:1987:i:1:p:87-103.

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