Substitute goods

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 .

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 .

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 :

• 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.

Examples of Substitute goods

• Coffee and Tea: Generally, when the price of coffee increases, the demand for tea increases. Both beverages are used for a morning pick-me-up, but tea is usually cheaper than coffee, making it a substitute option.
• Peanut Butter and Almond Butter: Peanut butter and almond butter are both nut-based spreads and are used in a similar way. Almond butter is usually more expensive than peanut butter, but it can act as a substitute good when the price of peanut butter increases.
• Cheese and Tofu: Cheese is a dairy product, and tofu is a plant-based product. Both can be used as a substitute in recipes that call for one or the other. The price of cheese is usually higher than tofu, so when the price of cheese increases, tofu can act as a substitute for cheese.
• Beef and Chicken: Beef and chicken are both meats and can act as substitutes for each other. Chicken is usually cheaper than beef, so when the price of beef increases, people are more likely to buy chicken as a substitute.

Advantages of Substitute goods

• Substitute goods provide consumers with more options. By having multiple options, consumers can make informed decisions that best suit their needs and preferences.
• Substitute goods can increase competition in the market, driving down prices and increasing the quality of goods and services. This can benefit consumers by providing them with more affordable options.
• Substitute goods can also help to create jobs. As demand for goods increases, more businesses will be created to provide those goods and services, creating more job opportunities.
• Substitute goods can help businesses remain competitive by providing them with a wider range of products to offer their customers. This can help businesses to increase their profits and stay ahead of their competitors.

Limitations of Substitute goods

• Substitute goods can be difficult to find and may not always satisfy the same need as the original good.
• Finding a suitable substitute good may be expensive as prices may vary from place to place.
• Substitute goods may not always be of the same quality as the original good.
• There may be legal restrictions on the availability and use of substitute goods.
• Substitute goods may have additional costs associated with them, such as additional transportation costs.
• Substitute goods may not be as readily available as the original good.

Other approaches related to Substitute goods

• Differentiation: Differentiation among substitute goods is a strategy in which a firm attempts to set its product or service apart from substitute goods in the eyes of consumers. It is a way of creating a unique and distinctive product that is perceived by the customer to be better than the other substitutes.
• Segmentation: Segmentation is a marketing strategy in which a firm divides the market into distinct subsets of customers and then designs and promotes a product or service specifically to meet the needs of each subset. This enables the firm to target the most appropriate segment of the market with its product and to tailor the marketing mix to meet the needs of the segment.
• Positioning: Positioning is a marketing strategy in which a firm tries to establish an image of its product or service in the mind of the customer. It is a way of creating an impression of the product or service in the minds of the customers that is different from that of the other substitute goods.
• Branding: Branding is a marketing strategy in which a firm creates a unique identity for its product or service in the mind of the customer. It is a way of creating an emotional connection between the customer and the product or service, by creating an impression that is distinct from that of the other substitute goods.

In conclusion, firms use various approaches to differentiate their product or service from substitute goods, such as differentiation, segmentation, positioning, and branding. These approaches are used to create a unique identity for the product or service and to establish an emotional connection between the customer and the product or service.

Substitute goods — recommended articles

Prestigious price strategy — Veblen effect — Prestige products — Market niche strategy — Types of market segmentation — Pricing strategy — Threat of substitutes — Demand — Skimming pricing strategy

References

• Editorial Board, (2015), Concise Dictionary of Economics, V&S Publishers, New Delhi
• Goodwin N., Harris J., Nelson J.A., Roach B., Torras M. (2014), Macroeconomics in Context Second Edition, Routledge, New York, p. 90-91
• Sloman J., Wride A. (2009), Economics Seventh Edition, Pearson Education, Edinburgh, p.34
• Winfrey J.C (1998), Social Issues. The Ethics and Economics of Taxes and Public Programs, Oxford University Press, New York, p. 62

Footnotes

Author: Aldona Pająk