ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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-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, which is due to consumers switching to cheaper products as prices increase, can be both positive and negative for consumers. The substitution effect is positive for consumers since it means that they can continue to afford a particular product even if prices increase or their incomes decline.

Detailed explanation-4: -The income effect is the change in the consumption of goods by consumers based on their income (purchasing power). The substitution effect happens when consumers replace cheaper items with more expensive ones due to price changes or when their financial conditions improve, and vice-versa.

Detailed explanation-5: -Marginal rate of substitution (MRS) is the willingness of a consumer to replace one good for another, as long as the new good is equally satisfying. Price elasticity of demand is a measure of the change in the demand for a product in relation to a change in its price.