Substitute good

In economics, one kind of good (or service) is said to be a substitute good for another kind in so far as
the two kinds of goods can be consumed or used in place of one another in at least some of their
possible uses.

Examples

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.

Increase in price

An increase in price (ceteris paribus) will result in an increase in demand for its substitutes goods. 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.

Different types

It is important to note that when speaking about substitute goods we are 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. In that case the utility
of a combination is an increasing function of the sum of the two amounts, and theoretically, in the case
of a price difference, there would be no demand for the more expensive good.

In microeconomics, two types of substitutes are being distinguished. Good X is said to be gross
substitute of good Y if

Goods X and Y are said to be net substitutes if

where U = U(X,Y) is a utility function.

Perfect and Imperfect substitutes

Perfect substitutes may alternatively be characterized as goods having a constant marginal rate of
substitution. Alternative 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, i.e.,
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.

Perfect Competition

One of the requirements for perfect competition is that the products of competing firms should be
perfect substitutes. When this condition is not satisfied, the market is characterized by product
differentiation.

Good Substitution

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.
Potatoes from different farms are an example; if the price one farm's potatoes goes up, people will stop
buying them and buy the other farm's instead, ceteris paribus (assuming that potatoes from different
farms are homogenous)