In economics, it is known by the name of substitute goods , also called substitutes, those that have the capacity to satisfy the same needs as others. Consumers understand that these goods, substitutes, can replace others without taking into consideration similar characteristics and price. In addition to products, there are services considered substitutes and their behavior is the same. It is important to keep in mind that substitute goods cover needs. They do not need to have similar characteristics to the replaced goods. For example, beef is a good that satisfies the primary need for food. A substitute good can be pork or fish.
Substitute goods are called , in the economy, all those products or services that can satisfy needs by substituting other goods. Products with the same characteristics are not substitute goods, but are normal goods that compete against others. This definition makes abstraction of the characteristics and the price, both of the substituted good and the substitute.
- Which are?
- Cross elasticity
- Differences between substitute goods and complementary goods
When we speak of substitute goods – they are also known as substitutes – we refer to all those goods, which can be products or services, which can satisfy the same needs of the consumer .
These goods compete in the market for consumer preferences. Brands participate in this competition trying to differentiate themselves from other goods by characteristics, offers, prices, promotions, etc.
When a brand wants to position itself in the preferences of consumers, it must do so by competing with goods with the same characteristics and with substitute goods. A typical example: cable TV services compete with each other, with satellite TV companies and, for some years now, with streaming services. We can consider the latter as substitute goods.
The main characteristic of substitute goods is that they have interrelated demands . This means that the consumer is free to choose one good or the other.
This cross demand that exists between substitute goods is the degree that the substitution relationship achieves .
The other inescapable characteristic of substitute goods is that when one of them increases in price, the demand for that good falls, being replaced by the demand for the other substitute good.
- Perfect substitute goods : It can be used in exactly the same way and with the same results as the good to be substituted.
- Imperfect substitute goods: When two goods can be used for the same purpose, but without the same results.
By pointing out that there is a cross demand between substitute goods, the concept of Cross Elasticity of Demand was born . It is the analysis of the percentage changes in the demand for a good when the price of another substitute good changes. In this case we speak of a positive cross elasticity.
It is appropriate to clarify that the calculation of the cross elasticity is also valid for complementary goods . Here, the demand turns negative.
An example of positive cross elasticity is that between butter and margarine. An increase in the price of the first can trigger a greater demand for the second good. This, because the consumer considers one substitutable for the other.
Differences between substitute goods and complementary goods
The fundamental difference between substitute and complementary goods is related to the demand.
Substitute goods have a positive cross elasticity of demand . This means that the demand for one good increases if the price of the other good increases.
In the case of complementary goods, the cross elasticity of demand is negative . When the price of a good increases, demand falls, along with the demand for the complementary good.
There are examples of substitute goods in everyday life. For example, margarine acts as a substitute for butter.
Streaming services have replaced cable or satellite television in many households.
The environmental movements have succeeded in replacing many products made with animal skins with synthetic products.