Substitution effect
Topic: Consumer Behaviour, Demand and Elasticity · NCERT: Class 12, Ch 2 "Theory of Consumer Behaviour"
Meaning
The substitution effect is the change in quantity demanded that happens because a good's price changes relative to other goods, keeping the consumer's level of satisfaction the same. When a good becomes relatively cheaper, she shifts some purchases towards it and away from the goods that are now relatively dearer. For a price fall, the substitution effect always raises the quantity of the cheaper good. This is one reason the demand curve slopes down.
Example
Bananas and mangoes are both fruits. If bananas get cheaper while mango prices stay the same, she buys more bananas and fewer mangoes, even if she feels no richer.
Don't confuse with
- Income effect: the change caused by the rise or fall in purchasing power. It can raise or lower demand depending on whether the good is normal or inferior. The substitution effect always works against the price change.
Related concepts
- Law of demand
- Income effect
- Normal good
- Inferior good
- Giffen good
- Veblen good
- Conspicuous consumption
- Bandwagon effect
- Snob effect
- Demonstration effect