substitution effect

  

Definition

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.

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