substitution effect

Definition

One of the two effects caused by a price change (the other is income effect), it 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: consumers always switch from spending on higher-priced goods to lower-priced ones as they struggle to maintain their living standards in face of rising prices. It is not confined only to consumer goods, but manifests in other areas as well such as demand for labor and capital.