SUBSTITUTION EFFECTSubstitution EfectRelative price of a good changes hen price changes Consu!ers ill tend to bu" !ore of the good that has beco!e relativel" cheaper# and less of the good that is relativel" !ore e$pensiveThe substitution efect is the change in an ite!%s consu!ption associated ith a change in the price of the ite!# ith the level of utilit" held constant&hen the price of an ite! increases# the substitution efect ala"s leads to an decrease in the 'uantit" de!anded of the good ) Substitution Efect *nor!al goodsIf a good is nor!al &hen price +uantit" de!anded &hen price +uantit" de!anded ) Substitution Efect *Inferior ,oods If a good is inferior hen price +uantit" de!anded &hen price +uantit" de!anded -Changes in a ,ood%s .rice+uantit" of x+uantit" of yU/ASuppose the consu!er is !a$i!i0ing utilit" at point A1U2BIf the price of good x falls# the consu!er ill !a$i!i0e utilit" at point B1Total increase in x3Changes in a ,ood%s .riceU/+uantit" of x+uantit" of yATo isolate the substitution efect# e hold4real5 inco!e constant but allo the relative price of good x to changeSubstitution efectCThe substitution efect is the !ove!entfro! point A to point CThe individual substitutes good x for good y because it is no relativel" cheaperThan67ou