Substitution Effects Short Answers
- AS, A-Level, IB
- AQA, Edexcel, OCR, IB, Eduqas, WJEC
Last updated 21 Mar 2021
In this short video we explore two questions relating to substitution effects in a market.
The two questions are:
- What is meant by the substitution effect in a market for two or more products?
- Goods X and Y are substitutes. Explain how a change in the cost of producing good X might affect the demand curve and the supply curve of good Y?
The substitution effect:
- The substitution effect describes the change in demand for a product when its relative price changes.
- For example, a rise in the price of music downloads on the Apple iTunes store might cause some consumers to substitute their spending to streaming services such as Spotify
- The closer two products are as substitutes and the lower the cost / inconvenience of switching, then the stronger will be the substitution effect.
Goods X and Y are substitutes. Explain how a change in the cost of producing good X might affect the demand curve and the supply curve of good Y?
- A change in the cost of producing good X will cause a shift in the supply of X
- For example, an increase in costs for energy suppliers might lead to a rise in the market price of electricity supplied to households.
- Some people may decide that this price hike is a good reason to spend money on solar panels (a substitute) to start generating their own renewable energy.
- An inward shift in the supply of Good X will cause a rise in the price of Good X
- This will cause an outward shift in the demand curve for the substitute good Y
- This will lead to an expansion along the supply curve for good Y – the market will reach a new equilibrium with a higher price and quantity traded.