Asked by Mohamed Araye on May 06, 2024
Verified
The substitution effect of a price change describes the change in the quantity demanded of a good due to a change in its relative price.
Substitution Effect
The economic concept that as prices rise (or incomes decrease), consumers will replace more expensive items with cheaper alternatives, holding utility constant.
Relative Price
Relative price is the price of one good or service compared to another, essentially indicating the trade-off between choosing one over the other.
- Acquire knowledge on the theories of substitution and income effects following changes in pricing.
Verified Answer
GZ
guangjiao zhangMay 07, 2024
Final Answer :
True
Explanation :
The statement is correct. The substitution effect occurs when a change in the price of a good or service causes consumers to shift their purchases towards either substitute goods or complementary goods. This is because consumers will substitute the good that has become relatively more expensive with a similar, but cheaper, alternative.
Learning Objectives
- Acquire knowledge on the theories of substitution and income effects following changes in pricing.