SSC
GENERAL ECONOMICS
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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income effect
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substitution effect
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elasticity effect
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demand effect
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Detailed explanation-1: -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-2: -The substitution effect is the change that would occur if the consumer were required to remain on the original indifference curve; this is the move from A to B. The income effect is the simultaneous move from B to C that occurs because the lower price of one good in fact allows movement to a higher indifference curve.
Detailed explanation-3: -Hicksian Substitution Effect A substitution effect shows change in consumer’s optimal consumption combination as a result of change in the relative price alone, real income of the consumer remaining unchanged.