Substitution Effect

Substitution Effect

When buyers of a product switch to a cheaper acceptable substitute if their preferred option increases in price while their income or revenue remains stable, this is known as the substitution effect. It results in demand shifting inversely to price. The substitution effect is most pronounced where readily available acceptable substitutes i.e. of the same quality exist. The effect exists in the consumer setting as well as the business context, where companies may opt to switch suppliers in the event of an increase in input prices.

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