substitution effect

the substitution of one PRODUCT for another resulting from a change in their relative prices. A fall in the price of a product normally results in more of it being demanded. A part of this increase is due to the substitution effect. A lower price for good X, with the prices of other goods remaining unchanged, will increase its relative attractiveness, inducing consumers to substitute good X in place of some of the now relatively more expensive items in their budgets. The substitution effect, together with the INCOME EFFECT, provide an explanation of why DEMAND CURVES are downward sloping. See CONSUMER EQUILIBRIUM, REVEALED PREFERENCE, PRICE EFFECT.

Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005

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References in periodicals archive ?

He explained that as the exchange rate depreciates, causing imports to fall, it will have an import substitution effect on the local industries which compete with imported goods.

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36) The effect emerging from a price change along a given demand curve would then have to be interpreted entirely as a substitution effect (Salerno 2018, pp.

THE INCOME EFFECT RECONSIDERED

The decrease in international urea prices produces a substitution effect for the local companies.

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Due to rise in prices there has been a substitution effect that is causing high-end materials to be replaced by low-end materials.

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In the fourth section, we summarize known results and apply them to establish that the substitution effect of an increase in downside risk on the choice of an optimal control reduces the degree of absolute downside risk aversion as measured by the Schwarzian.

DIRECTION AND INTENSITY OF RISK PREFERENCE AT THE THIRD ORDER

As such, we expect many listed companies to benefit from the substitution effect on the demand side, and to subsequently increase their production levels towards full capacity.

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It is happening because of digitisation - and that has created two hugely disruptive trends for our print media: "creative destruction" and "substitution effect".

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By contrast, if the elasticity of substitution is below some critical threshold, the increase in the relative volume of the ICT capital stock is offset by a fall in its relative price so that this substitution effect does not lead to any increase in the share of capital depreciation in value added at current prices.

Appendix: Supplementary technical material

During World War I, there was a large substitution effect of female labor for male labor in the UK.