ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The substitution effect may occur when, due to a change in relative prices and finances, a consumer replaces one product with another. That might mean switching out cheaper or moderately priced items for ones that are more expensive.

Detailed explanation-2: -The substitution effect is the decrease in sales for a product that can be attributed to consumers switching to cheaper alternatives when its price rises. When the price of a product or service increases but the buyer’s income stays the same, the substitution effect generally kicks in.

Detailed explanation-3: -The substitution effect states that when the price of a good decreases, consumers will substitute away from goods that are relatively more expensive to the cheaper good.

Detailed explanation-4: -A decrease in the price of substitute goods leads to an decrease in the demand for given commodity and vice versa. Eg., if price of a substitute good (say coffee) decreases, then demand for given commodity (say tea) will fall, so demand for a given commodity is directly affected by change in price of substitute goods.

Detailed explanation-5: -Beef prices rise and consumers respond by purchasing more turkey or chicken. Premium coffee prices at a coffee shop rise, and consumers respond by buying store brand coffee. Price increases in designer pharmaceutical drugs lead consumers to buy generic alternatives.