SUBSTITUTION EFFECT

The substitution effect is the change in consumption patterns due to a change in the relative prices of goods/services. It is an important feature in the anaysis of consumption.

For example, if some banks increase their fees by 10% and others increase their tuition by only 2%, then it is very likely that we would see a shift from the first group of banks to the second one (at least amongst customers eligible for the services of both banks). The same can be said for brands, goods, and even categories of goods.  Examples would be the relative price of Pepsi vs. Coke, Clothes vs. Entertainment, Mortadella vs. Prosciutto, Parmiggiano cheese vs. Grana cheese.