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.