Substitute goods

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Substitute goods
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Substitute goods - in economics, one way two or more goods are classified is by examining the relationship of the demand schedules when the price of one goods changes. This relationship between demand schedules leads to classification of goods as either substitutes or complements. Substitute goods are goods which as a results of changed conditions, may replace each other in use (or consumption). A substitute goods, in contrast to a complementary good, is a good with positive cross elasticity of demand. This means a good's demand is increased when the price of another good is decreased. If goods A will results in a leftward movement along the demand curve of A and cause the demand curve for B to shift out. A decrease in the price of A will result in a rightward movement along the demand curve of A and cause the demand curve for B to shift in [1] [2].

Substitution effect

The substitution effect refers to the tendency of consumers to respond to changes in price ratios by buying more of the lower-priced goods. Consumers compare the relative attractiveness of goods, that is, the additional "welfare per dollar". They substitute in favor of lower priced goods and away from the higher priced goods. First aspect of substitution effect: the change in the quantity demanded of a good resulting from a price change when the level of satisfaction of the consumer is held constant. Second aspect of substitution effect: measures how much less of a now more expensive commodity will be consumed simply, because of a price increase. It follows from the basic economic principle of substitution, consumers will tend to substitute a less expensive for a more expensive good or service [3] [4].

Difference between substitute goods and complementary goods

In educational books in the field of economics, these two concepts often appear together.An example is one of the better ways to explain the differences between substitute goods and complementary goods [5] [6]:

  • The number and price of substitute goods - The higher the price of substitute goods, the higher will be the demand for this good as people switch from the substitutes. For example, the demand for coffee will depend on the price of tea. If tea goes up in price, the demand for coffee will rise.
  • The number and price of complementary goods - Complementary goods are those that are consumed together. For example, cars and petrol. The higher the price of complementary goods, the fewer of them will be bought and hence the less will be demand for the good under consideration. For example, the demand for batteries will depend on the price of handheld games. If the price of handheld games comes down, so that more are bought, the demand for batteries will rise.

References

Footnotes

  1. Editorial Board, (2015)
  2. Sloman J., Wride A. (2009)
  3. Editorial Board, (2015)
  4. Winfrey J.C (1998)
  5. Sloman J., Wride A. (2009)
  6. Goodwin N., Harris J., Nelson J.A., Roach B., Torras M. (2014)

Author: Aldona Pająk