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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