Substitution effect
Effect that the relative price change of a good has on the quantity of the good demanded by a consumer
In consumer theory, the substitution effect is the change in a consumer's chosen combination of goods attributable to a change in their relative prices, distinguished from the income effect, caused by the resulting change in purchasing power. A price change can therefore be decomposed into substitution and income effects.
Nº Q372251 ★
Common · Knowledge
Substitution effect
Effect that the relative price change of a good has on the quantity of the good demanded by a consumer
In consumer theory, the substitution effect is the change in a consumer's chosen combination of goods attributable to a change in their relative prices, distinguished from the income effect, caused by the resulting change in purchasing power. A price change can therefore be decomposed into substitution and income effects.
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From Wikipedia
In consumer theory, the substitution effect is the change in a consumer's chosen combination of goods attributable to a change in their relative prices, distinguished from the income effect, caused by the resulting change in purchasing power. A price change can therefore be decomposed into substitution and income effects. When the price of a good falls, the consumer's budget constraint changes and the movement to a new consumption bundle can be separated into these two components. Graphically, the substitution effect is represented by a movement along the original indifference curve, while the income effect accounts for the subsequent movement to a different indifference curve. A related concept is the elasticity of substitution, for which John Hicks and Joan Robinson developed related definitions based on changes in the relative quantities and prices of factors of production.
Text: Wikipédia, CC BY-SA 4.0. · Image: Daniel Hoyos (CC BY-SA 3.0) ·
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