substitution effect



An effect caused by a rise in price that induces a consumer (whose income has remained the same) to buy more of a relatively lower-priced good and less of a higher-priced one.

Substitution effect is always negative for the seller: consumers always switch from spending on higher-priced goods to lower-priced ones as they attempt to maintain their living standard in face of rising prices. Substitution effect is not confined only to consumer goods, but manifests in other areas as well such as demand for labor and capital. See also income effect.

Use substitution effect in a sentence

  • My dad had a whole bunch of techniques for making profits and told me how he had recently tried to use the substitution effect to make people buy more cheaper things.

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  • If there is a form of substitution effect going on you need to adjust your strategy and maybe even your price for your products.

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  • The company was scared that they would lose a lot of money when the opposing Chinese company would begin to produce similar products that we're way cheaper in cost. The board argued about the substitution effect that would occur, what would happen when the consumers shifted from their higher priced goods to the Chinese made cheaper goods? Would their company lose a lot of money? They argued for days to figure out what to do and combat against the substitution effect that would inevitably occur. All consumers prefer to lower priced product if the quality is the same.

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