substituutioefektin

Substituutioefekti, or the substitution effect, is an economic concept that describes the change in consumption of a good due to a change in its relative price. When the price of a good falls, it becomes relatively cheaper compared to other goods. Consumers tend to substitute away from more expensive goods towards the now cheaper good. Conversely, if the price of a good rises, it becomes relatively more expensive, and consumers will likely reduce their consumption of it, substituting it with other goods that have not experienced the same price increase.

This effect is a fundamental part of consumer theory. It assumes that consumers aim to maximize their utility or satisfaction given their budget constraints. When the price of a good changes, the optimal consumption bundle shifts. The substitution effect isolates the impact of this relative price change, holding the consumer's real income or purchasing power constant. In simpler terms, it’s about how people switch to cheaper alternatives when prices change, regardless of whether they feel richer or poorer overall.

The substitution effect is distinct from the income effect, which describes the change in consumption due to a change in purchasing power. For normal goods, both effects lead to an increase in quantity demanded when the price falls. However, for inferior goods, the substitution effect still leads to an increase in quantity demanded, but the income effect leads to a decrease. The total effect of a price change on the quantity demanded is the sum of the substitution and income effects.