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Substitution Effect - Explained

What is the Substitution Effect?

Written by Jason Gordon

Updated at March 26th, 2023

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What is the Substitution Effect?

The typical response to higher prices is that a person chooses to consume less of the product with the higher price. This occurs for two reasons, and both effects can occur simultaneously. The substitution effect occurs when a price changes and consumers have an incentive to consume less of the good with a relatively higher price and more of the good with a relatively lower price.

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  • Diminishing Marginal Utility
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