Question

What do you mean by substitute goods? Give examples of two goods which are substitutes of each other.

Hint:

Substitutes satisfy the same want; positive cross-price elasticity is the defining test.

Answer 1

Step 1: Definition:
Substitute goods are two (or more) goods that can be used in place of one another to satisfy essentially the same want or need of the consumer.

Step 2: The defining economic test:
Substitutes have a positive cross-price elasticity of demand — when the price of one good rises, consumers switch away from it toward the other, so the demand for the other (substitute) good rises.

Step 3: Examples:
(i) Tea and Coffee — both satisfy the same want for a hot beverage, so if tea becomes costlier, many consumers shift to coffee, raising coffee's demand. (ii) Coca-Cola and Pepsi — both are cola soft drinks satisfying the same thirst/refreshment want, so a price rise in one typically shifts demand toward the other.

Final Answer:
Substitute goods satisfy the same want and can replace each other; e.g. tea & coffee, or Coca-Cola & Pepsi.