ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Which of the following replaces a costly item with a less costly one? Consider the term marginal utility.

Detailed explanation-2: -The substitution effect is a concept holding that as prices increase, or incomes decrease, consumers replace more-costly goods and services with less-expensive alternatives.

Detailed explanation-3: -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-4: -What is the Substitution Effect? 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.

Detailed explanation-5: -The availability of alternatives or substitute goods can affect demand elasticity. 1 Hence, the demand for goods or services with many substitutes is highly price elastic; a small increase in the price levels of goods causes consumers to buy its substitutes.