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MENTAL MODEL · M4354

The Substitution Effect

The Substitution Effect
BusinessHigh supportMicroeconomics
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Updated 2026-08-01

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INTRODUCTION

English translation pending.

CORE DEFINITION

A core concept in microeconomics, analyzed alongside the income effect. When the price of a good rises relative to others, consumers substitute away from it toward relatively cheaper alternatives, holding utility constant. The effect applies beyond goods to behaviors: if the cost of honesty rises, deception becomes relatively more attractive. Substitution is the main reason price increases redirect demand rather than simply reducing it.

SCAFFOLDING EFFECT

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- Predict spillover: ask where demand goes when a channel is restricted rather than whether it disappears - Check substitutes: verify whether a close alternative is available before raising price or imposing a ban - Watch behavior: expect the same underlying want to express itself through whichever route stays cheapest

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A price rise changes relative rather than absolute attractiveness, so consumers reallocate toward the option that now offers more value per unit of cost. Demand therefore moves along the substitution relationship instead of vanishing. Where a close substitute exists the shift is large; where none exists, the same price rise produces only a small change in quantity.

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Source support: Explicit

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