Google
Sunday 
January 20, 2019 

AmosWEB means Economics with a Touch of Whimsy!

AmosWEBWEB*pediaGLOSS*aramaECON*worldCLASS*portalQUIZ*tasticPED GuideXtra CrediteTutorA*PLS
LOCAL INPUT: An input that has a relatively small geographic market area due to the high cost of transportation. The high transportation cost means it is easier (that is, less expensive) to locate the production activity near the input rather than trying to bring the input to the production activity. Like many things, local inputs are a matter of degree. At the other end of the spectrum lies transferrable inputs. Natural resources of the land, such as soil fertility, weather conditions, mineral deposits, tend to have the greatest local orientation. Labor and many urban public utilities, such as water distribution and sewage disposable, also tend to fall into the local category.

Visit the GLOSS*arama


SUBSTITUTION EFFECT:

The change in quantity demanded that results because a change in the demand price of a good causes a change in the relative prices, which induces buyers to substitute the purchase of one good for another. This is one of two reasons, or effects, underlying the law of demand and the negative slope of the market demand curve. The other is the income effect.
The substitution effect offers part of an explanation for the law of demand and the negative slope of the demand curve. It rests on the observation that a change in price changes the relative price of substitute goods. If the price rises, then substitute goods become relatively less expensive to buy. If the price falls, then substitute goods become relatively more expensive to buy.

How It Works?

Buyers decide how much of different goods to purchase based, in part, on relative prices. As the price of one good changes, it changes relative to the prices of others goods, given that the other prices do not change. This induces buyers to alter the mix of goods purchased.

To illustrate how relative prices affect demand, consider the morning consumption habit of Duncan Thurly. Duncan buys two glazed donuts and two chocolate brownies from his local bakery, Donuts Dough-Lites, on his way to work every morning. Glazed donuts and chocolate brownies both carry a 50 cent price.

However, what might happen if Duncan enters the Donuts Dough-Lites bakery one morning to discover that the price of glazed donuts has fallen to 25 cents each? In all likelihood, Duncan rethinks his daily mix of pastry purchases. He might be inclined to purchase four glazed donuts and no chocolate brownies.

If Duncan alters his purchases, opting for four tasty glazed donuts, then he has fallen victim to the substitution effect.

Up and Down

Consider the substitution effect from both sides of a price change.
  • Higher Price: An increase in price causes a decrease in the relative prices of substitute goods. Buyers are inclined to buy more of the other substitute goods and less of this good. The result is a decrease in the quantity demanded.

  • Lower Price: A decrease in price causes an increase in the relative prices of substitute goods. Buyers are inclined to buy less of the other substitute goods and more of this good. The result is an increase in the quantity demanded.

Not A Determinant

The substitution effect is triggered by a change in demand price, given that the prices of other goods remain constant. This effect needs to be distinguished from a seemingly similar notion, the other prices demand determinant for a substitute good.
  • Substitution Effect: The substitution effect results from a change in demand price, which affects relative prices given that the prices of other goods remain unchanged. The change in relative prices then causes a change in quantity demanded and a movement along the demand curve. With the substitution effect, the price of this good changes, while other prices are fixed.

  • Other Prices Demand Determinant: Other prices are a demand determinant that also affects relative prices. However, in this case other prices change, while the price of this good remains unchanged. The change in other prices causes a change in demand and a shift of the demand curve. With the other prices demand determinant, the price of this good is fixed, while other prices change.

The Income Effect

The substitution effect is one of two effects underlying the law of demand and negative slope of the demand curve. The other is the income effect, which results because a change in price changes the purchasing power of income. While both effects are important, for most goods, the substitution effects tends to play the biggest role in a change in quantity demanded.

<= SUBSTITUTE-IN-PRODUCTIONSUPPLY =>


Recommended Citation:

SUBSTITUTION EFFECT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2019. [Accessed: January 20, 2019].


Check Out These Related Terms...

     | income effect | law of demand | demand schedule | demand curve | demand space | demand determinants | consumer surplus | change in demand | change in quantity demanded |


Or For A Little Background...

     | demand | demand price | quantity demanded | market | quantity | price | unlimited wants and needs | economic analysis | exchange | scarcity | good | service | cause and effect | satisfaction |


And For Further Study...

     | market demand | competition | consumer sovereignty | competitive market | efficiency | exchange | net-export effect |


Search Again?

Back to the WEB*pedia


APLS

YELLOW CHIPPEROON
[What's This?]

Today, you are likely to spend a great deal of time looking for the new strip mall out on the highway trying to buy either throw pillows for your bed or a package of blank rewritable CDs. Be on the lookout for slightly overweight pizza delivery guys.
Your Complete Scope

This isn't me! What am I?

Ragnar Frisch and Jan Tinbergen were the 1st Nobel Prize winners in Economics in 1969.
"Act well at the moment, and you have performed a good action for all eternity."

-- Johann Kaspar Lavater

ANN REPT
Annual Report
A PEDestrian's Guide
Xtra Credit
Tell us what you think about AmosWEB. Like what you see? Have suggestions for improvements? Let us know. Click the User Feedback link.

User Feedback



| AmosWEB | WEB*pedia | GLOSS*arama | ECON*world | CLASS*portal | QUIZ*tastic | PED Guide | Xtra Credit | eTutor | A*PLS |
| About Us | Terms of Use | Privacy Statement |

Thanks for visiting AmosWEB
Copyright ©2000-2019 AmosWEB*LLC
Send comments or questions to: WebMaster