What are Substitute Goods?

//What are Substitute Goods?
What are Substitute Goods? 2017-10-10T08:10:45+00:00

Definition: Substitute goods a product that can be interchanged with another good without any loss of use or value. In other words, it’s a comparable good that can be swapped out for another with little or no difference.

What Does Substitute Goods Mean?

What is the definition of substitute goods? A substitute good is chosen when the preferred good has changed in some sense making it more beneficial or even necessary to use the substitute good. These changes typically include changes to price, convenience, or composition.

The two goods may not function exactly the same, but they serve the same general purpose and satisfy the same customer needs. For instance, white and wheat bread aren’t exactly the same, but they are close enough.

Perfect substitutes, on the other hand, are theoretical goods that are identical in every way. Thus, if the price went up on one good, no one would buy it and everyone would buy the other good. This concept is more of an economic theory since no two goods are exactly alike, but it helps illustrate the point.

Let’s look at an example.

Example

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. She looked for products that could allow him to draw digitally and found the Galaxy tablet.

The Galaxy is a replacement because serves the same purpose as the iPad. It is, however, not perfect substitute because the iPad is much more preferred.

Thus, you can see the more sensitive goods are to price fluctuations, the more they are susceptible to substitutes. In other words, the more elastic two comparable goods are, the more they are substituted for one another as prices change.

Summary Definition

Define Substitute Goods: Substitute good means is a product or service that could replace a contending one without a significant change in usage or value.