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substitution effect
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Figure 7: Income effect and substitution effect (see text).
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substitution effect

economics
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Figure 7: Income effect and substitution effect (see text).
Figure 7: Income effect and substitution effect (see text).

In economics, the substitution effect describes how a change in the relative price of a good influences consumer demand. When the price of a good increases, it becomes relatively more expensive compared to other goods. This leads consumers to substitute away from the more expensive good towards cheaper alternatives, thus decreasing the demand for the good whose price has risen.1

This effect is one component of how price changes impact purchasing decisions, with the other being the income effect, which accounts for the change in overall purchasing power due to the price shift. The substitution effect is a fundamental concept in understanding consumer behavior and market dynamics.1

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4 Britannica Sources
  1. utility and value
  2. distribution theory - Substitution problems
  3. income tax - The meaning of income
  4. chemical compound - Substitution reactions

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