GENERAL KNOWLEDGE

Detailed explanation-1: -Substitution effect is the change in an item’s consump tion associated with a change in the item’s price with the utility level held constant.

Detailed explanation-2: -It means with the same money cheaper goods can be purchased and less expensive goods. So when relative price change, the quantity demanded of good changes keeping the level of utility remains constant is called the substitution effect.

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: -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-5: -The effect of any change in price can be decomposed into the substitution effect, which holds utility constant while changing and the income effect, which adjusts for the loss of purchasing power arising from the price increase.