Why is the substitution effect always negative?
Answers
Answer:
The substitution effect is always negative, as the OP suggests. Recall that the substitution effect is part of what happens when the price of a good changes. ... For inferior goods the income effect goes in the opposite direction. The substitution effect is (weekly) negative for all goods.
Answer:
The important factor responsible for the changes in consumption of a good is the substitution effect.
Whereas the income effect shows the change in the quantity purchased of a good by a consumer as a result of change in his income, prices of goods remaining constant, substitution effect means the change in the quantity purchased of a good as a consequence of a change in its relative price alone, real income or level of satisfaction remaining constant.
When the price of a good changes, he goes to a different indifference curve and his level of satisfaction changes. The Consumer goes to a different indifference curve as a result of a change in price because with this the real income or purchasing power of a consumer also changes. To keep the real income of the consumer constant so that the effect due to a change in the relative price alone may be known, price change is compensated by a simultaneous change in income.