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    SUBSTITUTION

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    Ayush Kapoor
    The substitution effect refers to the change in consumption of a good due to a change in the good's relative price, holding utility constant. When the price of a good increases, consumers will tend to buy less of it and more of substitutes that have become relatively cheaper, as they substitute toward less expensive options while maintaining the same level of satisfaction. For normal goods, the substitution effect always leads to a decrease in demand for the good as its price rises. For inferior goods, demand may increase or decrease depending on whether consumers substitute toward or away from the good in response to the price change.

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    SUBSTITUTION

    Uploaded by

    Ayush Kapoor
    8 views8 pages
    The substitution effect refers to the change in consumption of a good due to a change in the good's relative price, holding utility constant. When the price of a good increases, consumers will tend to buy less of it and more of substitutes that have become relatively cheaper, as they substitute toward less expensive options while maintaining the same level of satisfaction. For normal goods, the substitution effect always leads to a decrease in demand for the good as its price rises. For inferior goods, demand may increase or decrease depending on whether consumers substitute toward or away from the good in response to the price change.

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    The substitution effect refers to the change in consumption of a good due to a change in the good's relative price, holding utility constant. When the price of a good increases, consumers will tend to buy less of it and more of substitutes that have become relatively cheaper, as they substitute toward less expensive options while maintaining the same level of satisfaction. For normal goods, the substitution effect always leads to a decrease in demand for the good as its price rises. For inferior goods, demand may increase or decrease depending on whether consumers substitute toward or away from the good in response to the price change.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
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    Download as pptx, pdf, or txt
    8 views8 pages

    SUBSTITUTION

    Uploaded by

    Ayush Kapoor
    The substitution effect refers to the change in consumption of a good due to a change in the good's relative price, holding utility constant. When the price of a good increases, consumers will tend to buy less of it and more of substitutes that have become relatively cheaper, as they substitute toward less expensive options while maintaining the same level of satisfaction. For normal goods, the substitution effect always leads to a decrease in demand for the good as its price rises. For inferior goods, demand may increase or decrease depending on whether consumers substitute toward or away from the good in response to the price change.

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    © All Rights Reserved
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    of 8

    SUBSTITUTION

    EFFECT

    Substitution Effect
    Relative price of a good changes when price changes
    Consumers will tend to buy more of the good that has
    become relatively cheaper, and less of the good that is
    relatively more expensive
    The substitution effect is the change in an items
    consumption associated with a change in the price of the
    item, with the level of utility held constant
    When the price of an item increases, the substitution
    effect

    always leads to an decrease in the


    quantity demanded of the
    good

    Substitution Effect
    normal
    goods
    If a good is normal When price
    Quantity demanded

    When price

    Quantity demanded

    Substitution Effect
    Inferior Goods

    If a good is inferior when price


    Quantity demanded

    When price

    Quantity demanded

    Changes in a Goods Price


    Suppose the consumer is maximizing
    utility at point A.

    Quantity of y

    If the price of good x falls, the consumer


    will maximize utility at point B.
    B
    A
    U2
    U1

    Quantity of x
    Total increase in x
    6

    Changes in a Goods Price


    Quantity of y

    To isolate the substitution effect, we hold


    real income constant but allow the
    relative price of good x to change
    The substitution effect is the movement
    from point A to point C

    U1

    The individual substitutes


    good x for good y
    because it is now
    relatively cheaper
    Quantity of x

    Substitution effect
    7

    Thank
    You

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