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The law of demand can be explained by the substitution effect. If the price of a good is lower than expected, then, that good appears to a consumer as a bargain opportunity in comparison to the goods which remain at full price. The consumer will temporarily switch his/her pattern of consumption by substituting bargain items for full price items.
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Suppose a customer is undecided between pork chops and steak before entering a supermarket. If pork chops have a special promotion at a reduced price, while steak has not, that is likely to induce the customer to buy the pork chops with no remaining hesitation. This is an illustration of the substitution effect. |
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