Question

The substitution effect:

a) Measures the change in the quantity of a good demanded brought about by a change in real income associated with a change in the price of the good
b) Measures the change in the quantity demanded of a good from a change in its relative price
c) Is generally so weak that its effect cannot be predicted
d) For an increase in the relative price of a good is sometimes positive, but sometimes negative.

Answer 1

The substitution effect measures the change in quantity demanded of a good due to a change in its relative price, often illustrated in demand graphs. It operates alongside the income effect, affecting total utility and consumer choices when there's a price change.

Step-by-step explanation:

The substitution effect is a concept in microeconomics that describes a consumer's reaction to a change in the price of a good. Specifically, it measures the change in the quantity demanded of a good from a change in its relative price. When the price of a good increases, consumers are incentivized to consume less of this good and more of a substitute good with a relatively lower price, and vice versa when the price decreases.

Simultaneously, the income effect must be considered, which is a result of the change in the consumer's purchasing power due to the price change. A decrease in the price of a good can lead to an increase in quantity demanded because it is cheaper relative to other products, meaning the consumer may buy more of it (substitution effect), and because the consumer now has more disposable income to buy additional units of the good—or other goods—than before the price decrease (income effect).

Together, these effects can shift consumer choices and affect demand, as shown in demand graphs that illustrate changes in total utility, or the satisfaction derived from consumer choices.