ECONOMICS

PROJECT
 TOPIC:-
Effect of price
change in substitute
goods
Name:-Ankit
Roll number:-8
Class:-11th CBSE Commerce
School:-Poddar Brio International
School , Badlapur (E)
Acknowledgement;-
I would like to express my special thanks of gratitude
to my teachers.
◦ Mrs. Esther Nadar as well as our principal Mrs.
Rashmi who have me the golden opportunity To do
this wonderful project on the topic effect of Substitute
good which also help me in doing a lot of research
and I came to know about so many new things.
Certificate:-
• This is to certify that Ankit student of class 11
CBSE has successfully completed the
Economics project on the topic “effect of price
change on a substitute good” under the
guidelines of Poddar Brio International School
and as for CBSE guidelines.
Index:-
◦ Introduction
◦ Objectives of studying
◦ Review of literature
◦ What is Substitution effect(short)?
◦ Change in price of substitute goods
◦ Practical example of Substitution effect (Case Study)
◦ General FAQs on substitute goods
◦ Conclusion
◦ Biblography
Objectives of studying:-

◦ To understand consumer behavior, market dynamics, and

pricing strategies. Objectives include analyzing how price
changes impact demand for the substitute, predicting shifts in
market share, and devising effective pricing strategies to stay
competitive. It also aids in identifying potential revenue changes
and gauging the elasticity of demand for the substitute product.
Review of literature:-
1. Substitution effect
The substitution effect is a change in the quantity demanded at the same level of utility. Thus, even if the individual
remains on the same satisfaction curve, his consumption pattern will be reallocated to equalize the MRS ( Marginal
Rate of Substitution) with the new price ratio . (Anggrasari Herdiana, 2018) The substitution effect explains how
consumption patterns change when the price of one good changes relative to the price of another good. Consumers can
look for cheaper alternatives when the price of certain goods or services increases, so they can maintain their lifestyle.
Conversely, when the price of a good falls, the quantity demanded for that good will increase . (Nasrudin, 2019) The
substitution effect is the impact that occurs when there is a change in the relative price of good X to good Y so that an
attempt is made to replace one item with another. With a change in the price of an item, say X, the relative price of
item X to item Y also changes. (Suprayitno,2018) From some of the meanings of the substitution effect above, it can
be concluded that it can explain how changes in relative prices affect consumer choices. When choosing a product,
consumers will consider its price and the price of alternative products. This concept derives from the cross-price
elasticity of demand. From some of the meanings of the substitution effect above, it can be concluded that it can
explain how changes in relative prices affect consumer choices. When choosing a product, consumers will consider its
price and the price of alternative products. This concept derives from the cross-price elasticity of demand.
NOW, TWO SLIGHTLY DIFFERENT
CONCEPTS OF SUBSTITUTION EFFECT
HAVE BEEN DEVELOPED; ONE BY HICKS
AND ALLEN AND THE OTHER BY
SLUTSKY THESE TWO CONCEPTS OF
SUBSTITUTION EFFECT HAVE BEEN
NAMED AFTER THEIR AUTHORS.
THE TWO CONCEPTS DIFFER IN REGARD TO
THE MAGNITUDE OF THE CHANGE IN MONEY
INCOME WHICH SHOULD BE AFFECTED SO
AS TO NEUTRALIZE THE CHANGE IN REAL
INCOME OF THE CONSUMER WHICH RESULTS
FROM A CHANGE IN THE PRICE. WE SHALL
EXPLAIN HERE HICKSIAN SUBSTITUTION
EFFECT.
IN HICKSIAN SUBSTITUTION EFFECT PRICE CHANGE IS
ACCOMPANIED BY A SO MUCH CHANGE IN MONEY INCOME
THAT THE CONSUMER IS NEITHER BETTER OFF NOR WORSE
OFF THAN BEFORE.
IN OTHER WORDS, MONEY INCOME OF THE CONSUMER IS
CHANGED BY AN AMOUNT WHICH KEEPS THE CONSUMER ON
THE SAME INDIFFERENCE CURVE ON WHICH HE WAS BEFORE
THE CHANGE IN THE PRICE. THUS HICKSIAN SUBSTITUTION
EFFECT TAKES PLACE ON THE SAME INDIFFERENCE CURVE.
What is Substitution effect(short)?
THE SUBSTITUTION EFFECT REFERS TO THE CHANGE IN
DEMAND FOR A GOOD AS A RESULT OF A CHANGE IN THE
RELATIVE PRICE OF THE GOOD COMPARED TO THAT OF
OTHER SUBSTITUTE GOODS. FOR EXAMPLE, WHEN THE
PRICE OF A GOOD RISES, IT BECOMES MORE EXPENSIVE
RELATIVE TO OTHER GOODS IN THE MARKET. AS A
RESULT, CONSUMERS SWITCH AWAY FROM THE GOOD
TOWARD ITS SUBSTITUTES.
Change in price of
substitute goods
Increase In price of substitute goods:-
When price of substitute goods (say coffee) rises, demand
for the given commodity (say tea) also rises from OQ to
OQ¹ at its of OP. It leads to a rightward shift in the demand
curve of the given commodity from DD to D¹ D¹.
Decrease in price of substitute goods:-

With decrease in price of substitute goods (coffee) demand

for the given commodity (tea) also decreases from OQ to
OQ¹ at the same price of OP. It shifts the demand curve of
the given commodity towards left from DD to D¹D¹.
Practical examples of change in
substitution effect (Case Study):-
EXAMPLE: JOHN EATS RICE THAT COSTS $5 PER POUND
AND PASTA THAT COSTS $10 PER POUND. THE RELATIVE
PRICE OF 1 POUND OF PASTA IS 2 POUNDS OF RICE. AT
THEIR CURRENT PRICES, JOHN CONSUMES 1 POUND OF
PASTA AND 2 POUNDS OF RICE.
DUE TO SOME TECHNOLOGICAL ADVANCES IN
RICE CULTIVATION, THERE IS A FALL IN RICE
PRICES FROM $5 A POUND TO $2 A POUND. THE
RELATIVE PRICE OF 1 POUND OF PASTA HAS NOW
INCREASED FROM 2 POUNDS OF RICE TO 5
POUNDS OF RICE.
THEREFORE, JOHN SWITCHES AWAY FROM PASTA
AND INTO RICE. THE CHANGE IN CONSUMPTION
OCCURS PURELY DUE TO THE CHANGES IN THE
RELATIVE PRICE OF THE GOODS AND NOT
BECAUSE OF A CHANGE IN INCOME.
General FAQs on substitute
goods:-
Types of substitute goods:-
◦ Direct:-
PEPSI AND COCA-COLA
MCDONALDS AND BURGER KING
PLAYSTATION AND XBOX
SUPERMARKET-BRANDED AND BRANDED PRODUCTS
TRANSPORT BY CAR OR TRAIN
IPHONE AND SAMSUNG GALAXY
PIZZA HUT AND DOMINO’S
PHYSICAL BOOKS AND KINDLE
◦ Indirect:-
DANCING AND BOWLING
BOWLING AND VIDEO GAMES
BANANA AND DOUGHNUTS
What are complementary goods?

SUBSTITUTE GOODS ARE TWO GOODS THAT CAN BE USED IN PLACE

OF ONE ANOTHER, FOR EXAMPLE, DOMINOS AND PIZZA HUT. BY
CONTRAST, COMPLEMENTARY GOODS ARE THOSE THAT ARE USED
WITH EACH OTHER. FOR EXAMPLE, PANCAKES AND MAPLE SYRUP.

THE KEY DIFFERENCE IS THAT SUBSTITUTE GOODS REPLACE ONE

ANOTHER, WHILST COMPLEMENTARY GOODS ADD VALUE TO THE
OTHER.
CONCLUSION
WHEN THE PRICE OF A GOOD THAT
COMPLEMENTS A GOOD DECREASES, THEN THE
QUANTITY DEMANDED OF ONE INCREASES
AND THE DEMAND FOR THE OTHER
INCREASES. WHEN THE PRICE OF A SUBSTITUTE
GOOD DECREASES, THE QUANTITY DEMANDED
FOR THAT GOOD INCREASES, BUT THE
DEMAND FOR THE GOOD THAT IT IS BEING
SUBSTITUTED FOR DECREASES.