Glamor Economics

Chapter 43

Chapter 6 Section 6 Eat more beef and mutton when the price of pork rises——substitution effect

One day a cobbler in Kerm killed a customer.So he was brought to court, and the judge sentenced him to be hanged.After the verdict was announced, a citizen stood up and said loudly: "My lord, it is the cobbler in the city who you sentenced to death! We have only one cobbler, if you hang him, who will mend our shoes? "

At this time, other citizens of Kerm City also appealed with one voice.The judge nodded approvingly and re-sentenced. "Citizens of Kerm," he said, "you are right. Since we have but one cobbler, it would be in no one's interest to execute him. There are two roofers in the town, let one of them do it for him." go to hell!"

This story illustrates the irreplaceable importance, and of course such a story can only appear in fables.Examples of substitutes can be seen everywhere in real life, especially in economic activities.

When the price of a commodity changes, there are two effects on consumers:
One is to change the real income level of consumers.Here, a change in the level of real income is defined as a change in the level of utility.The second is to change the relative price of commodities.Both of these changes will change the quantity demanded by consumers for that commodity.

The substitution effect refers to the tendency that when the relative price of a commodity falls, consumers increase their consumption of that commodity (using the commodity as a "substitute"); and when the relative price of a commodity rises, consumers Reduce consumption of the good (the good is "substituted").For example, an increase in the price of rice would cause people to choose wheat as an alternative commodity.

Substitution effects appear frequently in our economic life.From the perspective of substitution effect, the emergence of bird flu in 2004 hit the production of poultry-related products to a certain extent, but did not hit the development of the entire rural economy as a whole.Because during the epidemic of bird flu, people's dietary resistance to chicken is the most obvious, and they also have concerns about ducks, geese and other poultry related products.Poultry, traditionally the main meat of the population, is now in significantly reduced supply.Therefore, people's meat-eating objects are concentrated on pigs, cattle, sheep, fish and other animals.

Goods with close substitutes tend to have more elastic demand because it is easier for consumers to switch from one good to another.For example, butter and margarine are easy substitutes for each other.Assuming that the price of margarine remains constant, a slight increase in the price of butter will cause a significant decrease in the quantity of butter sold.In contrast, since eggs are a food for which there are no close substitutes, the demand for eggs is less elastic than for butter.

[links to related words]

The substitution effect is a change in the relative price of a commodity caused by a change in the price of a commodity, which leads to a change in the quantity demanded by consumers while keeping utility constant, which is called the substitution effect of price changes.

Independent goods are goods whose needs are independent of each other.More precisely, other things being equal, if a change in the price of item A has no effect on the demand for item B, then A and B are said to be independent goods.

(End of this chapter)