Question

What is the substitution effect?

Explain substitution effect.

Answer 1

The change in the quantity demanded of a product that occurs due to a change in its relative price is referred to as the substitution effect. This concept describes how consumers tend to favor goods that have become relatively cheaper while reducing their consumption of those that have become relatively more expensive. For example, if the price of coffee decreases while the price of tea remains constant, coffee becomes relatively more affordable. As a result, consumers may find coffee more appealing than tea and are likely to shift their consumption from tea to coffee.