Topic Videos

Substitution Effects Short Answers

Level:
AS, A Level, IB
Board:
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.

Short Answers - Substitution Effects

The two questions are:

  1. What is meant by the substitution effect in a market for two or more products?
  2. 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.

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