Substitution effect

The substitution effect in economy:

Just as the Income effect, it results from the arbitration of a Economic agent, according to its Opportunity cost, between two situations.

In the example of the arbitration of the worker between work and leisure, the agent compares its advantages between work (and thus wages) and the leisure. There is substitution effect when the price on the job market increases (i.e. wages).

If there is substitution effect, the opportunity cost increases. In this case, the cost of free time is more expensive than before. The loss for the economic agent, if the leisure is selected, is all the more important. It thus tends to arbitrate in favor of work, with the detriment of the leisure. It thus substitutes work for the leisure. For the neo-classic economists, the substitution effect always dominates the income effect, which is at the base of the postulates of the theory in microeconomy.