ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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-2: -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-3: -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-4: -A small reduction in price may make an expensive product more attractive to consumers, which can also lead to the substitution effect. Companies experience the substitution effect, too, e.g., when they outsource production to take advantage of cheaper labor costs.

Detailed explanation-5: -An increase in the price of a good will increase demand for its substitute, while a decrease in the price of a good will decrease demand for its substitute.