How is the substitution effect defined?

The substitution effect is defined as the change in quantity demanded of a good resulting from a change in its price relative to substitute goods. When the price of a good falls, it becomes relatively cheaper compared to its substitutes, leading consumers to substitute the cheaper good for the more expensive ones. This effect highlights how consumers adjust their purchasing decisions based on changes in relative prices while maintaining their overall level of satisfaction or utility.

For instance, if the price of coffee decreases significantly, consumers may choose to buy more coffee and less tea, since coffee has become a more attractive option. The substitution effect is a key concept in understanding consumer behavior and demand curves in the context of price changes.