When the price of a good drops, the substitution effect causes consumers to increase their consumption of that good because it becomes relatively cheaper compared to other goods. As a result, consumers tend to substitute away from more expensive alternatives and buy more of the now cheaper good
. In other words:
- The good with the price decrease becomes more attractive relative to its substitutes.
- Consumers shift their spending toward this cheaper good.
- Consumption of the cheaper good rises, while consumption of other relatively more expensive goods decreases
This effect occurs because the relative price change makes the good more affordable compared to alternatives, prompting consumers to adjust their consumption patterns accordingly
. Therefore, under the substitution effect, a price drop leads to an increase in the quantity demanded of that good as consumers replace other goods with it.
