Substitution Effect Analysis
Updated 2026-08-13
INTRODUCTION
English translation pending.
CORE DEFINITION
In consumer theory, the effect of a price change is not a single quantity but the sum of two components. The substitution effect is the change in what a consumer buys because the good has become relatively cheaper or dearer compared with alternatives. The income effect is the change caused by the shift in real purchasing power that the price change produces. The Slutsky and Hicks decompositions separate the two along the indifference curve, and the analysis applies equally to predicting which products a rival's new offer might displace.
SCAFFOLDING EFFECT
Reduce cognitive load
- Split the response: separate the substitution part from the income part before concluding. - Watch relative prices: track how the offer's price compares with its closest substitutes. - Recheck for inferior goods: confirm whether the income effect can reverse the substitution effect.
Anchor fast decisions
A price change alters two things at once: the good's standing against its substitutes, and the buyer's real command over goods. The substitution effect works through the first channel, moving purchases along the existing preference curve toward the relatively cheaper option. The income effect works through the second, expanding or contracting the whole budget. Because the two can point in opposite directions, the observed total response says nothing about either component alone.
MINIMUM ACTION
In progress 0/1Practice this model in one real situation:
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Source support: Explicit
- en.wikipedia.orghttps://en.wikipedia.org/wiki/Substitution_effectverified
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