Everything about Substitute Good totally explained
In
economics, one kind of
good (or service) is said to be a
substitute good for another kind insofar as the two kinds of goods can be consumed or used in place of one another in at least some of their possible uses. Classic examples of substitute goods include
margarine and
butter, or
petroleum and
natural gas (used for heating or
electricity). The fact that one good is substitutable for another has immediate economic consequences: insofar as one good can be substituted for another, the
demand for the two kinds of good will be bound together by the fact that customers can trade off one good for the other if it becomes advantageous to do so. Thus, an
increase in
price for one kind of good (
ceteris paribus) will result in an
increase in demand for its substitute goods, and a
decrease in
price (
ceteris paribus, again) will result in a
decrease in demand for its substitutes. Thus, economists can predict that a spike in the cost of wood will likely mean increased business for bricklayers, or that falling cellular phone rates will mean a fall-off in business for public pay phones.
It is important to note that when speaking about substitute goods we're speaking about
two different kinds of goods; so the "substitutability" of one good for another is always a matter of degree. One good is a
perfect substitute for another only if it can be used in exactly the same way. Perfect substitutes may alternately be characterized as goods having a constant
marginal rate of substitution. Alternate types of soft drinks are commonly used as an example of perfect substitutes. As the price of
Coca Cola rises, consumers would be expected to substitute
Pepsi in equal quantities, for example, total cola consumption would hold constant. Also, blank media such as a writable
Compact Discs from alternate manufacturers would be perfect substitutes. If one manufacturer raises the price of its CDs, consumers would be expected to switch to a lower cost manufacturer.
Imperfect substitutes exhibit variable marginal rates of substitution along the consumer
indifference curve.
One of the requirements for
perfect competition is that the products of competing firms should be perfect substitutes. When this condition isn't satisfied, the market is characterized by
product differentiation.
Substitute goods exhibit no complementarities, as in a
complementary good.
In other words,
good substitution is an
economic concept where two goods are of comparable value. Car brands are an example. While someone could argue that Ford trucks are much different from Toyota trucks, If the price of Ford trucks goes up enough, some people will buy Toyota trucks instead.
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