Define substitution effect.
Understand the Problem
The question is asking for a definition of the substitution effect, which is a concept in economics that describes how consumers will replace more expensive items with less expensive alternatives when prices change. This definition typically involves discussing the implications for consumer behavior in response to price variations.
Answer
The substitution effect is the change in consumption patterns due to a change in the relative prices of goods.
The substitution effect is the change in consumption patterns due to a change in the relative prices of goods.
Answer for screen readers
The substitution effect is the change in consumption patterns due to a change in the relative prices of goods.
More Information
When the price of a good rises, consumers tend to buy less of that good and more of other relatively cheaper substitutes, and vice versa.
Tips
A common mistake is to confuse the substitution effect with the income effect. While the substitution effect changes consumption due to relative price changes, the income effect changes consumption due to changes in consumers' real income.
Sources
- Substitution Effect - Investopedia - investopedia.com
- Behavioral Economics - The Substitution Effect - behavioraleconomics.com
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