Substitution+Effect

=Substitution Effect= When determining a demand curve you consider tastes of a consumer, the number of buyers, their incomes, their expectations and prices of related goods. When you have two goods that could be interchangeable they are known as substitutes. The substitutes effects is seen when the relative prices of goods change. And it therefore states when the price of the original good goes up the demand of the replacement good goes up. An example of substitutes would be Frosted Flakes and the generic brand Frosty Flakes. If the price of Frosted Flakes went up, comsumers would buy Frosty Flakes instead, therefore increasing the demand of the replacement product. This effect works for any two goods that are interchangeable: Nike and Adidas, Pepsi and Coke, Bauer and Reeboks. However, when determining you have to keep in mind that consumer preference could be more important to them than the price of the good.

media type="youtube" key="FxOIebkmrqs" height="344" width="425" This Mac vs. PC commercial illustrates that PC and Mac are substitues.

Sample question when the price of hamburgers increases relative to hot dogs, which of the following represents a likely change in the demand for hamburgers: A) consumers demand ten thousand more hamburgers and five thousand fewer hot dogs B) consumers demand ten thousand more hamburgers and five thousand more hot dogs C) consumers demand ten thousand fewer hamburgers D) there is no change in consumer demand for hamburgers (answer below) [|wikipedia- substitution effect] [|economist - substitution effect] [|an international examination of the substitution effect in the context of the aggregate demand curve]



Sample answer: C - consumers would demand fewer b/c the price has reduced relative to hot dogs