Brand loyalty most directly affects which economic effect by reducing the likelihood of switching when prices change?

Brand loyalty most directly affects which economic effect by reducing the likelihood of switching when prices change?

• A. Income effect
• B. Substitution effect
• C. Law of demand
• D. Giffen effect

Answer: (B)

Brand loyalty dampens how price changes influence choices by weakening the substitution effect. The substitution effect is what happens when a price increase makes other brands or products relatively cheaper, prompting a switch away from the pricier brand. When a consumer is strongly loyal, they’re less likely to switch to alternatives, so the substitution effect is reduced. The remaining impact comes from the income effect—the change in purchasing power due to the higher price, which can lower the quantity purchased even without switching brands. The law of demand describes the general price–quantity relationship, and the Giffen effect is an atypical, unrelated case. So the key idea is that loyalty reduces the substitution effect.

Brand loyalty dampens how price changes influence choices by weakening the substitution effect. The substitution effect is what happens when a price increase makes other brands or products relatively cheaper, prompting a switch away from the pricier brand. When a consumer is strongly loyal, they’re less likely to switch to alternatives, so the substitution effect is reduced. The remaining impact comes from the income effect—the change in purchasing power due to the higher price, which can lower the quantity purchased even without switching brands. The law of demand describes the general price–quantity relationship, and the Giffen effect is an atypical, unrelated case. So the key idea is that loyalty reduces the substitution effect.