What is the substitution effect?

The substitution effect refers to the changes in consumption patterns that occur when consumers switch from one good to another as a result of changes in relative prices. When the price of a good decreases, it becomes relatively cheaper compared to other goods, prompting consumers to buy more of that good instead of more expensive alternatives. This behavior illustrates how consumers adjust their consumption in response to price changes, opting for substitutes that maximize their utility given their budget constraints.

In the context of the other options, the reduction in consumption due to higher prices reflects the overall impact of price changes, but it does not capture the essence of substitution. While an increase in consumption due to a price decrease indicates a positive response to lower prices, it does not specifically address the relative comparison between goods, which is central to the substitution effect. Lastly, the effect of income changes on consumer choice relates to the income effect, which is distinct from the substitution effect as it focuses on how changes in consumer income impact overall consumption rather than the shifting consumption habits due to price relationships. Thus, the focus on consumers' switching behavior in response to price is what defines the substitution effect.