Defining Substitute Goods

Substitute goods are items that consumers can use in place of one another. For example, tea and coffee are often considered substitutes.

Price-Demand Relationship for Substitutes

When two goods are substitutes, they have a direct relationship between the price of one good and the demand for the other.

• If the price of one good (e.g., Good A) increases ($\uparrow P_A$), consumers will find it relatively more expensive.
• As a result, consumers tend to buy less of Good A and switch to the relatively cheaper substitute good (e.g., Good B).
• This switch causes the demand for Good B to increase ($\uparrow D_B$).

Therefore, an increase in the price of one substitute commodity leads to an increase in demand for the other commodity.