The substitution effect and the output effect work in the same direction.

Question

Quizplus · Accepted Answer

The substitution effect and the output effect often work in opposite directions. The substitution effect occurs when a change in the price of a good causes a consumer to substitute one good for another, while the output effect relates to how the change in price affects the quantity demanded of the good. For example, if the price of a good decreases, the substitution effect would lead consumers to buy more of the cheaper good (substituting it for more expensive alternatives), while the output effect would increase the quantity demanded because the good is now cheaper. These effects can work in opposite directions, especially in the context of supply and production decisions in firms.

The Substitution Effect and the Output Effect Work in the Same