Economics
Substitute Goods
Substitute goods are products that can be used in place of each other to satisfy a particular need or want. When the price of one substitute good increases, consumers tend to shift their demand to the cheaper substitute. For example, if the price of coffee rises, some consumers may switch to tea as a substitute. This concept is important in understanding consumer behavior and market dynamics.
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3 Key excerpts on "Substitute Goods"
eBook - PDF- Jonathan Parker, Adrian Majumdar(Authors)
- 2016(Publication Date)
- Hart Publishing(Publisher)
In each case, product A would, over time, command a higher price relative to product B, even if B remains a strong competitive constraint on A (in terms of the cross-price effect). Thus, one might observe a permanent change in the ratio of prices, even if it remains the case that (other things being equal) a higher price of A would substantially increase demand for B, and vice versa. Further, even if relative prices are stable over time, this need not reflect close substitutability – it may simply reflect the fact that: (i) both products employ similar inputs and so face similar cost shocks, or that (ii) both products face similar demand shocks – e.g ., rising incomes may increase the demand for (and hence price of) high quality furniture such that the relative prices of (say) premium tables and premium chairs stay broadly constant, however, this does not mean that teak tables and leather chairs are substitutes. 50 A point to watch is that because demand for a product is expected to fall when its price rises, economists often refer to the absolute value of own-price elasticity of demand ( i.e ., here they would UK Merger Control 375 Cross-price elasticity measures the proportionate change in demand for product A as a consequence of a change in the price of product B. Substitute Goods exhibit positive cross-price elasticities. For example, if a 1% increase in the price of product B leads to a 2% increase in demand for product A, then the cross-price elasticity is +2. The higher the cross-price elasticity, the stronger the constraint between the products and so evidence on cross-price elasticities are useful for market definition (and closeness of substitution). 51 By way of illustration, in Pan Fish/Marine Harvest , the CC constructed a model of demand for Scottish salmon in the UK to examine the interaction between demand and price for Scottish and Norwegian salmon.
eBook - PDF- Colin Harbury(Author)
- 2014(Publication Date)
- Pergamon(Publisher)
For normal goods the income and substitution effects work in the same direction. In the case of an inferior good, the substitution effect is usually expected to more than offset the income effect, so that demand curves normally slope downwards. Where this is not the case the good is described as a 'Giffen good'. The SUPPLY of a commodity is, like demand, related to a number of different factors. The SUPPLY SCHEDULE and SUPPLY CURVE show the amounts of a commodity which potential sellers, referred to variously as PRODUCERS, BUSINESSES, FIRMS or SUPPLIERS, are prepared to offer for sale at different prices during a given period of time. Supply curves often tend to slope upwards, i.e. sellers offer larger amounts for sale at high prices than at low ones. Supply, however, is strongly affected by costs of production, the state of technology, the form of business organization and the type of market in which the firm is operating. These may be called CONDITIONS OF SUPPLY, and are dealt with in the next chapter. The responsiveness of demand and supply to price changes differs from one commodity to another. The measure of responsiveness used by economists is known as the coefficient of ELASTICITY, defined as the percentage (or proportionate) change in quantity divided by the determining percentage (or proportionate) change in price. The numerical value of this ratio normally varies between zero and infinity. It is useful to distinguish three limiting cases of elasticity with the values of 0, 1 and infinity. Where the ELASTICITY OF DEMAND equals 1 (or unity), the percentage changes in price and quantity are the same; a rise or fall in price does not affect total revenue (price times quantity) or the receipts of the seller. When the value exceeds unity, demand is said to be elastic; a change in price changes total revenue in the opposite direction to the change in price.
eBook - PDF- Steven Landsburg(Author)
- 2013(Publication Date)
- Cengage Learning EMEA(Publisher)
Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. demand. But if X is coffee and Y is cream, a 1% increase in the price of cream is likely to lead to a decrease (that is, a negative percentage change) in your coffee consumption and so in this case the cross elasticity of demand is negative. When the cross elasticity of demand for X with respect to Y is positive, we say that X and Y are substitutes . When it is negative, we say that they are complements . Substitutes, as the name indicates, tend to be goods that can be substituted for each other, as in our example of tea and coffee. Other examples might be Coke and Pepsi, or train tickets and airline tickets. Complements tend to be goods that are used together — each complements the other. We have seen the example of coffee and cream. Other pairs of complements might be computers and software, or textbooks and college courses. Example: Is Coke the Same as Pepsi? Coke is quite a good substitute for Pepsi; we know this because the cross elasticity of demand 4 is a relatively large .34, that is, when the price of Pepsi rises 1%, sales of Coke rise a hefty .34%. That perhaps is not surprising. What ’ s more surprising is that (regular) Coke is an even better substitute for Diet Pepsi; here the cross elasticity of demand is an even larger .45. But Coke is above all a close substitute for Diet Coke where the cross-elasticity is an enormous 1.15. By and large, Coke and Pepsi are good substitutes for most other soft drinks. When the price of Mountain Dew goes up, a lot of people switch to Pepsi (cross elasticity .77).
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