What is the substitution effect?

Sometimes known as the type of substitution exchange, the substitution effect is a term used to describe how price change affects consumer purchasing activities. In fact, this particular phenomenon is one of the two different effects that may occur as a result of a change in price. The substitution effect usually concerns situations in which the consumer is motivated to buy a less cost -effective product and replace it with a product that costs less.

One of the factors associated with the substitution effect is the assumption that the consumer intake level does not change. Only the price has changed. The consequence is that if the price remains at an earlier level, the consumer would not have any motivation to change because he considered the former price fair. Unlike the income effect where consumer revenue moves, this particular phenomenon focuses directly on the impact of the price change in the way consumers will change their shopping habits as they get the same amount without spending additional money.

is dIt is important to realize that the substitution effect does not indicate that consumers simply stop buying a product with a higher price completely. Instead, they reduce the consumption of this product and at the same time increase product consumption with a lower price. While the small difference in the price was not previously enough to motivate consumers to try a lower price product, the increase in the price of the advantageous product has made savings more attractive and cause a change.

This often applies to budget limitations because consumers try to maintain their expenses to a certain extent. For example, if the price of a particular brand of canned green beans increases from $ 0.75 (USD) per can of $ 1.00 per can, some consumers may be motivated to try a house or storage that is $ 0.50. Rather than buying four cans of a higher price product, the consumer buys two cans of each brand, effectively compensate for an increaseThe price of price and spends the same amount of money to obtain the same amount of canned green beans.

Products may not be similar to cause a substitution effect. Everything required, it is necessary to partially replace the use of a product that now carries a higher price mark that costs less. This means that if the price of a hamburger increases noticeably, the household may decide to reduce beef consumption from four nights a week to three, increasing the consumption of a more economical chicken. Another approach would be to increase the consumption of vegetables and at the same time reduce the use of meat in several meals throughout the week.