Substitution effect

As a rule, consumers use goods not separately, but in some combinations (sets). A set is a collection of a certain number of benefits that are consumed together in a specific period of time.

The change in the value of one good with the invariance of the prices of others is always relative. In other words, one value is more expensive (or cheaper) relative to others. Change in price provokes changes in real consumer income. So, before the price was lowered, the consumer could acquire a smaller amount of good, and after the reduction - more. At the same time, savings may appear, which can be used to purchase other goods. Thus, the change in the value of a certain value affects the demand structure in accordance with two directions: the volume of demand can change under the influence of changes in its relative value or real consumer profit.

The effect of income and the effect of replacement arise in the conditions of any price change. This is due to the fact that the number of available goods varies, their relative value. The effect of replacement and the income effect are the consumer's reaction.

In the first case, the structure of consumer demand changes in accordance with the change in the value of one of the benefits included in the consumer set. The substitution effect provides that the consumer is reoriented from one value to another with the growth of the value of one of them. In this case, another benefit will have similar consumer properties, but a constant value. In other words, the substitution effect provides for the consumer's inclination to give preference to cheaper goods rather than more expensive ones. As a result, there is a decline in demand for initial value.

The effect of income is called influence on the structure of consumer demand by changing the real profit of the buyer, provoked by changes in the value of the good. With a decrease in the price of one product, there is a certain effect on the overall price level, which makes the consumer richer. Thus, he can get more of a single product, while not denying himself the purchase of other benefits.

For normal products (goods), these effects are added together. The reason is that the lowering of the price of goods provokes an increase in demand for them. So, for example, a consumer who has a certain unchangeable income, buys coffee and tea, which are related to normal goods. If we consider the substitution effect in this case, it will reflect the following:

- a reduction in the price of tea will provoke an increase in demand for it;

- Due to the fact that the cost of coffee will remain unchanged, this product will become relatively expensive (compared to tea);

- rational consumers will replace relatively expensive coffee with relatively cheap tea, while demand for the latter will increase.

Along with this, a drop in the cost of tea will make the consumer somewhat richer, that is, his real profit will increase somewhat. Than the level of profit for the population is higher, the higher for normal products and demand. The profit growth can be directed both on purchase of additional quantity of tea, and for purchase of coffee.

Thus, in the same situation, both effects will act in one direction. With the decrease in the cost of conventional goods, the demand for them will increase, and vice versa. The effect of substitution will lead to an increase in demand. At the same time, the real profit of the consumer will also increase. Thus, the income effect will also take place, also contributing to the increase in demand. In this situation, the law of demand is fulfilled .