substituutiovaikutus

Substituutiovaikutus, or the substitution effect, is a fundamental concept in economics that describes how a change in the relative price of a good influences consumer demand. When the price of a good decreases, it becomes relatively cheaper compared to other goods. Consumers tend to substitute away from the now more expensive goods and towards the cheaper one, increasing their consumption of the good whose price has fallen. Conversely, if the price of a good increases, it becomes relatively more expensive, and consumers will likely substitute away from it and towards more affordable alternatives.

This effect is one component of the total price effect, the other being the income effect. The income effect describes how a price change affects a consumer's real purchasing power. The substitution effect, however, focuses solely on the change in consumption patterns due to altered relative prices, assuming the consumer's real income remains constant in terms of their ability to purchase the original basket of goods. It highlights that consumers are rational and seek to maximize their utility by adjusting their consumption choices when prices shift, ensuring they get the most value for their money. The strength of the substitution effect can vary depending on the availability and closeness of substitutes for the good in question.