Substitute

A substitute (substitutable good) is a good or service with similar or the same characteristics as another good or service. In other words, a substitute is a product, which can be replaced by another product.

Substitutes help to expand the market's range of products and services to meet customer needs. The specifications of goods often indicate a replacement for a standard part in a case of damage.

Understanding Substitutes

Substitutes provide options, alternatives, choices. Choice occurs when there are at least two products for the same purpose. The substitutes must relate to each other in some way. This relationship can be close, as with coffee from different producers, or distant, as with coffee and tea.

Substitutes create choice of goods in the marketplace. Choice of goods creates competition. Competition helps to reduce prices. Low prices are good for consumers, but bad for manufacturers. Companies' profits can decrease because of customer preferences, resulting in loss of market share.

According to research, when the price of goods goes up, the demand for substitute goods also goes up. Consumers begin to look for cheaper alternatives to expensive goods. For example, when the price of coffee goes up, the demand for tea also increases because consumers want to save their money. And vice versa, when the price of a product drops, the demand for its substitute also drops.

Good and not so good Substitutes

Determining whether a product or service is a substitute can be difficult. There are several degrees of substitutability of a product. A substitute can be good or not so good. It depends on its satisfiability to the consumer.

If the substitute can be used in the same way as the product, then it is a good substitute. In this case, the utility of the good or service is almost identical. The good's manufacturers may be different, but the purpose and use are the same. For example, milk from two different producers. A car and a bicycle are not good substitutes, but they serve the same function of transportation.

But good substitutes can also have slight differences. Consumers can easily accept this difference and may prefer one product over another. For example, a consumer may choose Coke over Pepsi, even if the price goes up because he or she likes the taste. If a consumer is guided by the brand difference, he or she may consider Pepsi as not so good substitute for Coke, even though they are good substitutes in terms of economics.

Substitute goods in perfect and monopolistic competitions

Under perfect competition, good substitutes are sometimes goods of different firms, but almost without differences. For example, gasoline at two different gas stations located next to each other may be almost identical. If one gas station raises its prices, people will choose the cheaper option.

Under monopolistic competition, the concept of substitutes becomes very complicated. Monopolistic producers are not price sensitive because they are not afraid of competition and pricing. For example, the same chemical composition of the same medicine from different manufacturers. Consumers are more likely to prefer purchasing a brand-name drug over a generic, believing that it is more respected or has better quality.