Substitution Effect
Categories: Financial Theory, Econ
See: Income Effect.
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'd choose less expensive alternatives in place of potentially more expensive versions of stuff 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?
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 finding 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.