Question

1 Distinguish between the substitution effect and substitute products.
2 What is 'rationing'? Why is rationing done?
hey any one pls help me by answering two questions

Answer 1

1) Substitution effect is the result of availability of substitute products. Substitution effect can be explained as the decrease or increase of demand of one product due to decrease or increase in the prices of its counter part(substitute products) respectively. For example - lets take an example of two substitue products to understand this substitution effect. Say two substitute products are cadbury chocolate and nestley chocolate. When price of cadbury chocolate increase, it will be costly, so consumers will no more buy it, rather buy its substitute that is nestley, leading to high demand for nestley chocolate . So when there is a increase in price of one product , demand for its substitute increase and vice -versa.

Substitute products are the goods that can be used alternatively. These causes substitution effect. Examples are - cadbury chocolate and nestley chocolate, tea and coffee, heels or sleepers etc, which can be interchanged one for another.

2) Rationing in economics can be understood as a way in which intentionally demand and supply is changed. It means that it is an artifical control on the distribution of goods and services in an economy. Rationing is done to make a balance between the supplumy and demand of a good. Excess of demand will lead to high price which is not good for an economy , similarly high supply is not good as prices of goods are lower to be profitable for producers. Hence government intervenes to regulate the demand and supply if commodities. So that there remains a balance and equilibrium is built, which satisfies both buyers and sellers such actions like rationing is undertaken. Balance of demand and supply is a must for the economy as it affects both consumer and suppler and hence the economy as a whole. Also rationing helps to lessen the gap of rich and poor at times. As at certain times govenment reduces prices to help poor get benifited so that they are able to consume the goods and services. Thus rationing serve all these purposes.