substitution effect

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.
References in periodicals archive ?
It is not only a financial restraint, it is also a substitution effect in favour of more fancy pieces with stones.
In developing countries, the child labor is under the pressure of increasing with substitution effect and of decreasing with income effect during the period of economic growth.
The reason the oil substitution effect is happening so quickly is the impact high prices have on business profits.
However, a person with decreasing absolute risk aversion might treat insurance as a Giffen good when the income effect is greater than the substitution effect.
The substitution effect would stem from the lower wages and fewer job opportunities for teenagers associated with higher unemployment rates.
This is partly because of reduced gross family income resulting in lower red meat consumption and because of a substitution effect by consumers who see poultry as a cheaper and healthier protein source.
However, the effect on goods that cannot be bought at Wal-Mart is more ambiguous: consumption of these goods may fall through a substitution effect or rise through an income effect.
Thus, the net effect on leisure demand of increased spousal leisure may combine a positive substitution effect and a negative income effect.
There is no substitution effect between consumption of goods between sectors.
Without having taken the substitution effect caused by the price changes into consideration, six commodity groups, whose prices had changed significantly over the period, had together overestimated Taiwan consumers' cost of living by 4.
the substitution effect is the phenomenon of increasing savings rate, when the individual wishes a higher consumption in the second period of their life than the first period (Mishkin, 2004).
The differences are driven mainly by the dampened wealth effect and the strengthened intertemporal substitution effect, not by the escapes emphasized by Williams (2003).