The substitution effect is what happens when something you buy gets too expensive, so you buy a cheaper alternative instead. Similarly, if you had to take a pay cut, you choose less expensive alternatives to compensate for a more expensive version you would’ve bought if you had more money.
Who needs a TV when you can just watch videos on your laptop? Who needs ice cream parlour ice cream when you can buy cheaper ice cream from the grocery store? Who needs (legal) pot from a dispensary when you can just buy the seeds and grow your own grass (again, if it’s legal)?
A more unconventional example: dog-people adopting a cat instead of a dog. Many people grow up with dogs, and feel themselves to be true dog-people. But with crushing student debt and apartment city living, many dog-people want a dog...but find owning a dog too expensive. Dogs take more time (time is money) and more space. Cats are easier to care for, and still make great companions (in their own way), making cats a substitute for dogs among many dog-people.
Related or Semi-related Video
Econ: What is Market Equilibrium?4 Views
And finance Allah shmoop what is market equilibrium All right
people when we're talking market equilibrium we're talking about the
market for a specific good or service pick a thing
Anything Market equilibrium happens when the quantity demanded of a
thing equals the quantity supplied of a thing at a
given price Well at market equilibrium there's no excess supply
which would mean you know cranky suppliers and no excess
demand which would mean cranky consumers at equilibrium Everybody's chill
at a price Well the reason economist gush over market
equilibrium like a diehard believer at a J Beat's concert
is because well it's kind of a magical force of
its own Like the mother nature of capitalism When the
market is competitive market equilibrium happens naturally If you ever
heard of Adam Smith's invisible hand well this is what
he was talking about In a perfectly competitive market where
there are lots of equally size sellers selling no Amazons
or Walmart stopping all over the little guy's the invisible
hand is what keeps surpluses and shortages from happening For
example the fake mustache market Yes there's a market for
that where the mustache supply curve crosses with the mustache
demand curve And that's where mustache equilibrium is that drop
a plumb line down from equilibrium to see the equilibrium
Quantity of moustache is likewise You can see the equilibrium
price where the supply and demand curves cross on the
left hand side of graft In our perfectly competitive mustache
market the amount of moustache is sold in the price
they're soul That is capitalism's invisible hand at work When
suppliers try to sell their fake mustache is at too
high a price Consumers will Balkh They'll think it's a
rip off and go buy somewhere else instead Leaving cellars
with a surplus of fake mustache is Remember the mustache
market has many mustache suppliers all competing against one another
well because consumers will flock to the mustache supplier with
the best value like best prices in this case since
it's all the same moustache Will this keep suppliers from
holding the fake mustache market hostage Many mustache The buyers
competing for the dollars of mustache buyers will naturally drive
prices down if they're too high Well the invisible hand
smacks mustache suppliers upside the head making suppliers realized they
should drop their price if they want to sell some
moustache is but they don't want to make the price
too low because well if suppliers dropped the price of
a fake moustache is too low Well there will be
a mustache shortage in a while We can't have that
right The moustache will be super cheap Everyone rushed to
buy one and there won't be an in store and
people be cranky Yes when there's a shortage of moustache
is there's an ugliness Not even the best fake mustache
could cover up Consumers will be at each other's throats
Fighting over fake moustache is like it's Black Friday or
something like that When they're all sold out consumers will
be demanding Mauritz just too good of a deal So
in the case of a moustache shortage the invisible hand
will be smacking mustache suppliers upside the head again making
the supplier realized they could be making more money if
they sold more Mustache is and at a higher price
Well after competitive suppliers get some wise guidance from the
smack smack invisible hand We get market equilibrium Just like
Goldilocks The invisible hand says Uh not too much not 00:03:08.503 --> [endTime] too little but just right Yeah
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