When the price of one good increases, the demand for a substitute good tends to increase as well. Since goods C and D are substitutes, more good C will replace the use of good D. So less good D would be bought only if the demand for good D decreases by shifting to the left.

If the budget increases, the consumer will have a budget line farther away from the origin. In a bid to be the lowest seller in the market, companies try to use the least amount of resources in their manufacturing process to reduce costs. However, this works against the welfare of the consumer, as it sometimes leads to the production of low-quality products.

What Are Substitute Goods?

Paul Boyce is an economics editor with over 10 years experience in the industry. Currently working as a consultant within the financial services sector, Paul is the CEO and chief editor of BoyceWire. He has written publications for FEE, the Mises Institute, and many others. Substitute goods are two goods that can be used in place of one another, for example, Dominos and Pizza Hut.

A substitute good is a product that can be used as a replacement for another product because it serves the same purpose. If the price of one product goes up, people may choose to buy the substitute instead, which can lead to a decrease in demand for the original product. The difference in each situation is example of substitute goods an economic phenomenon known as the price elasticity of demand. The term explains how much demand will change based on the price change. Furthermore, the monopoly market works if there is no substitution (or very low). That way, monopolists can control the market, and consumers want to buy their products.

Cross Price Effect on Demand Curve

The sign, i.e. plus or minus, plays a significant role in the cross-price elasticity of demand, as it determines whether the commodities are complements or substitutes. A substitute good is a good that a consumer may substitute for another good if the price of the consumer’s normal choice rises too high or the consumer’s preference is unavailable. Substitution will occur if the products are similar enough to meet a consumer’s need and there is a positive cross elasticity of demand. In economics, a substitute good is a product or service that can replace another product or service with little to no perceivable difference to the consumer.

She looked for products that could allow him to draw digitally and found the Galaxy tablet. An increase or decrease in the price of complementary goods has an inverse impact on the demand for a given commodity. We consider that one good is a substitute for another when it is capable of satisfying the same consumer need. The substitute good (or substitute) is one that can satisfy the same need as another. In this way, in the eyes of the consumer, the substitute good can replace the function of another, whether or not they are similar in terms of their characteristics or price.

Factors that Affect Substitute Goods

Pat has always wanted an iPad; he is an architect and would like to change from drawing on paper to drawing digitally. He’s heard about the good reviews and value an iPad has and likes the apps that are offered only on iPad. His girlfriend was going to buy him one for Christmas but in response to the holiday demand, Apple increased their prices. Unfortunately, she couldn’t afford the new price, so she had to look for a replacement.

So, with the above discussion, it is quite clear that the change in the price of related goods has a great impact on the quantity demanded of the main product. While the price and demand relationship in the case of substitutes is directly proportional, it is inversely proportional in the case of complements. The goods which are used together to satisfy a specific want, like bread and butter are known as Complementary Goods. The price of a complementary good and demand for the given commodity inversely relates to each other.