Answer to Question #77209 in Microeconomics for benhur

Question

is substitution effect always positive

Answer 1

No, the substitution effect is normally negative in nature. Substitution effect is caused by a rise in price that makes a consumer, income remaining the same, to buy more of a relatively lower-priced good than a higher-priced one. It shows consumers preference for relatively cheaper goods. The negative substitution effect implies that the relative price of a good/commodity and its quantity demanded change in opposite direction, meaning- the decline in relative price of a commodity always causes increase in its quantity demanded. This negative substitution effect is the basis of the Law of demand stating inverse relationship between price and quantity demanded. It is also negative for the seller as it prevents them from raising their prices and earning higher profits.

Answer: No, substitution effect is normally negative.