If the price of good X increased relative to the price of Y, and there is no change in a person's purchasing power, a rational person would: (Substitution effect slide) A. Increase purchases of X and reduce purchases of Y B. Reduce purchases of X and increase purchases of Y C. Not change their behaviour, they like the amounts they purchased.
The substitution effect is the shift in consumption based on by a price adjustment while maintaining the same utility. The good whose price increased is reduced as a result of the substitution impact. The amount of money required for the consumer to purchase their old bundle at the new costs is exactly the same as the amount needed to maintain their utility from an insignificant price rise. Consumption might fluctuate as the price ratio between things changes. This is due to two factors. First, by lowering a product's relative price, buyers are more likely to choose it over competing products as long as they are normal goods, not inferior goods, Second, a consumer may now purchase more of the product for the same price. The substitution impact refers to the first component, which is caused by the shift in the price ratio. The income effect refers to the second component, the change in consumption brought on by the change in purchasing power.
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