Substitute (Economics)

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Definition of Substitute:

Substitutes are goods or services that have the same function, but are not the same product.

Detailed Explanation:

If the price of oranges increases, the quantity demanded of oranges would drop, so fruit loving consumers would purchase peaches instead of oranges. Peaches and oranges are substitutes. When the price of a good increases, the demand for all of its substitutes will also increase. Conversely, if the price of a good decreases, the demand for its substitutes will decrease. Competing companies in the same industry often sell substitute goods. For example, Coca-Cola and PepsiCo offer substitute soft drinks. If PepsiCo lowers its price, it can expect an increase in the quantity demanded for its soft drinks. Using the graph below, if PepsiCo reduced its price from P1 to P2, it can expect an increase in the quantity demanded from Q1 to Q2.

Many consumers would now substitute Pepsi soft drinks for Coca-Cola soft drinks because they are substitutes. The demand for Coca-Cola would decrease. On the graph below this is illustrated by a shift of Coca-Cola's demand curve from A to B.

Dig Deeper With These Free Lessons:

Demand - The Consumer's Perspective
Changes in Demand - When Consumer Tastes Change
Supply and Demand - Producers and Consumers Reach Agreement

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