In economics, the choice by a consumer to select one product over another when one becomes cheaper relative to its alternative is known as the substitution effect.
One example of this effect is happening now in the desert southwest, where the combination of high oil prices with the substitution effect may provide an entrepreneurial company with the demand needed to significantly grow its business: making natural liquid rubber from the bark of the guayule (pronounced "why-you-lee") plant.
As reported by the Arizona Republic, the opportunity provided by higher oil prices, which has increased the cost of manufacturing synthetic rubber, has allowed the Yulex company to attract $8 million USD in venture capital to expand its business, at a time when the cost of the company's product has become very competitive with the cost of the synthetic version derived from oil.
Funny how when prices go up, there suddenly turns out be a lot more supply of things than anybody previously thought! Somehow, the conventional wisdom never accounts for the entrepreneur or for innovation.
Labels: economics
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