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At a Glance of Incremental substitution economics

This Blog discusses Incremental substitution economics and the effects of incremental substitution. How widespread are they, and what conclusion can you draw from Incremental substitution. What are the effects and No flooding?

Incremental substitution economics

In the previous blog, we saw how prices facilitate the allocation of resources and rationing and distribution. We will see a similar price phenomenon in this blog called incremental substitution.

We all believe that health is more important than entertainment. But does that mean you should keep 20 years of band-aid supply in your closet and give up movies and music entirely to pay for it? Absolutely not.

The main thing to understand here is nothing is more important or less important than the other thing. We require substitution and should be incremental.

The value of a particular thing is dependent on the amount that is already present, and it also affects the value of other things, i.e., it has relative value. For example, if you have stacked up, say, 6 months of band-aid and medical aid, you will not spend more on it now.

You will spend more on a music CD. You will take a subscription to Netflix or Spotify subscription to take care of your entertainment today. In this case, you valued entertainment more than medical aids as you already had it in your store.

You could have bought more than 6 months of medical assistance as health is essential, but you gave up medical aid. Next time you might trade-off both medical assistance and entertainment. It is just that you increased your substitution/trade-off for another thing. The impacts are not just at the individual level like we saw in this example of health vs. medical. Incremental substitution has broader consequences.

Incremental substitution economics – At a Broader level

Let us take the example of milk, cheese, ice cream, and yogurt that we had taken in one of our earlier blogs. Milk is used to make cheese, ice cream, and yogurt. If the demand for cheese rises, the producers will try to produce more cheese and bid more milk. As the demand for milk increases, the prices of milk will also rise. This will, in turn, increases the prices of ice cream and yogurt as well. Now, if the buyers of ice cream still want to buy and of yogurt don’t want to buy it at higher prices.

Then the share of milk of yogurt will go to making cheese. We need to understand that only the amount of milk valuable to its respective consumers goes to them accordingly. As the value of ice cream is still the same in its consumers, then the milk share they got is the same.

If we had set cheese more critical than the other two, the market would have received only cheese and ultimately made it useless. The milk distribution was given importance according to its value. If we look at it at a broader level, society made a total substitution/trade-off of a bit of yogurt for cheese. And the prices were also incremental for all the products. No product holds more importance than others. It is just that amount of thing present with you regarding its demand that determines its relative value. The cheese was attending a little less than the demand, and the incremental adjustments happened automatically.

Effects and No flooding

If we look even further due to the increase in the milk prices, the prices of cows will rise. More cow farming will be started because the land will be used for cow farming than vegetable farming. This incremental substitution is spread worldwide like a wave formed in water by throwing a stone in it.

The first thing it does is no flooding of the market. Had we given fundamental importance to cheese, then it would have flooded the market with cheese. But as we were making incremental trade-offs, the right amount of cheese was made.

Variation in the relative value of things is so decisive that they can make good things bad and bad things good. For example, salt, fat, and cholesterol are essential for the human body. Still, many people in many different countries have consumed it so much that they have reduced their life. In the same way, alcohol causes many problems like road accidents to liver damage. Still, studies show that small and systemic alcohol intake can improve your health and be lifesaving. Alcohol is not categorically good or bad.

Conclusion

Whenever there are two or more things that have some value cannot be categorically more valuable than the other. The value of each depends on how much of each we already have at the moment. And therefore, the value depends on the changing amount of one product that we are willing to give up to get more of another product. This a very important so that we do not flood the market with too much of the same product.

To ensure that we must not give a particular product categorically more critical than others. Though many governments end up doing the opposite the society pays the overall prices.

A diamond is much more worth than a penny, but many pennies together are more worth than a diamond.