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Unformatted text preview: on two brands of soap. Both varieties of soap perform the same function and therefore are substitutes of each other. If the price of one of the brands falls, it becomes cheaper. The consumer may then spend more (say $7) on it and increase the demand for the cheaper brand?. On the other hand, he is left with only $3 which he spends on the second brand. The demand for the second brand which is relatively dearer, therefore decreases. Such an act of shifting demand from a dearer to a cheaper good is called the substitution effect . This kind of an effect works in the inverse direction: a fall in price results in a rise in demand and is therefore negative in its influence....
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- Fall '10