Substitute Goods

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Substitute Goods

Definition of Substitute Goods

Substitute goods are those goods that can satisfy the same necessity, they can be used for the same end.

Examples of Substitute Goods

  • Coca-cola and Pepsi
  • Car, motorbike, bike and public transport
  • Butter and margarine
  • Tea and coffee
  • Bananas and Apples

Cross Elasticity of Demand of Substitute Goods

Cross elasticity is the percentage change in quantity demanded for a good  that occurs in response to a percentage change in price of anther good:

eAB = (ΔQA/QA)/(ΔPB/PB)

In the case of substitute goods, the cross elasticity is positive:

If the price of a substitute good increases, the demand of the second good will increase. For example: if the price of Coca-Cola increases, some people will buy Pepsi instead.

Graphical Analysis

Substitute Goods

 

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This content is for information and educational purposes only and should not be considered investment advice nor portfolio management. Past performance is not an indication of future results. Leveraged products can carry a high degree of risk.
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