Substitute Good

Examples of Substitute Good in the following topics:

• Cross-Price Elasticity of Demand

  • The cross-price elasticity may be a positive or negative value, depending on whether the goods are complements or substitutes.
  • A positive cross-price elasticity value indicates that the two goods are substitutes.
  • For substitute goods, as the price of one good rises, the demand for the substitute good increases.
  • Conversely, the demand for a substitute good falls when the price of another good is decreased.
  • Two goods that are substitutes have a positive cross elasticity of demand: as the price of good Y rises, the demand for good X rises.

• Determinants of Price Elasticity of Demand

  • A good's price elasticity of demand is largely determined by the availability of substitute goods.
  • Availability of substitute goods: The more possible substitutes there are for a given good or service, the greater the elasticity.
  • When several close substitutes are available, consumers can easily switch from one good to another even if there is only a small change in price .
  • Conversely, if no substitutes are available, demand for a good is more likely to be inelastic.
  • The relative high cost of such goods will cause consumers to pay attention to the purchase and seek substitutes.

• Market Demand

  • The demand schedule represents the amount of some good that a buyer is willing and able to purchase at various prices.
  • In general, this means that the demand curve is downward-sloping, which means that as the price of a good decreases, consumers will buy more of that good.
  • A market demand schedule is a table that lists the quantity of a good all consumers in a market will buy at every different price.
  • However, special cases exist where the preference for the good or service may be perverse.
  • Two different hypothetical types of goods with upward-sloping demand curves are Giffen goods (an inferior but staple good) and Veblen goods (goods characterized as being more desirable the higher the price; luxury or status items).

• Applications of Principles on Consumer Choices

  • The substitution effect is closely related to that of the income effect, where the price of goods and a consumers income will play a role in the decision-making process.
  • In the substitution effect, a lower purchasing power will generally result in a shift towards more affordable goods (substituting cheaper in place of more expensive goods) while a higher purchasing power often results in substituting more expensive goods for cheaper ones.
  • This translates to the graph above as the consumer makes choices to maximize utility when comparing the price of different goods to a given income level, substituting cheaper goods and more expensive goods dependent upon purchasing power.
  • This two-part graphical representation of the substitution effect identifies the relationship between the price of a given good and the quantity purchased by a given consumer.
  • Explain the labor-leisure tradeoff in terms of income and substitution effects

• Characteristics of Pure Competition

  • Sellers cannot charge a price above the market price because sellers see all other goods in the market as perfect substitutes.
  • They can buy those goods at the market price.

• Impact of Income on Consumer Choices

  • As a result, it is useful to outline the differences in income effects on normal, inferior, complementary and substitute goods:
  • Inferior:Inferior goods, or goods that are less preferable, will demonstrate inverse relationships with income compared to normal goods.
  • Complementary: Complementary goods are goods that are interdependent in consumption, or essentially goods that require simultaneous consumption by the consumer.
  • Substitutes: Perfect substitutes are essentially interchangeable goods, where the consumption of one compared to another has no meaningful impact on the consumer's utility derived.
  • Substitutes are goods that a consumer cannot differentiate between in terms of the need being filled and the satisfaction obtained.

• Demand Function

  • The behavior of a buyer is influenced by many factors; the price of the good, the prices of related goods (compliments and substitutes), incomes of the buyer, the tastes and preferences of the buyer, the period of time and a variety of other possible variables.
  • An individual's demand function for a good (Good X) might be written:
  • A superior good is a special case of the normal good.
  • Goods may be related as substitutes (consumers perceive the goods as substitutes) or compliments (consumers use the goods together).
  • If goods are substitutes, (shown in Figure III.A.3) a change in PY (in Panel B) will shift the demand for good X (in Panel A).

• Mapping Preferences with Indifference Curves

  • A consumer would be just as happy with any combination of Good X and Good Y on the curve .
  • Perfect Substitutes: To understand what a indifference curves will look like when products are perfect substitutes, please see .
  • Perfect substitutes are often homogeneous goods.
  • In this particular series of indifference curves it is clear that 'Good X' and 'Good Y' are perfect substitutes for one another.
  • Describe the indifference curves for goods that are perfect substitutes and complements

• Changes in Demand and Shifts in the Demand Curve

  • Movements along the demand curve are due to a change in the price of a good, holding constant other variables, such as the price of a substitute.
  • Shifts in the demand curve are related to non-price events that include income, preferences and the price of substitutes and complements.
  • An increase in income will cause an outward shift in demand (to the right) if the good or service assessed is a normal good or a good that is desirable and is therefore positively correlated with income.
  • Alternatively, an increase in income could result in an inward shift of demand (to the left) if the good or service assessed is an inferior good or a good that is not desirable but is acceptable when the consumer is constrained by income .
  • A change in preferences could result in an increase (outward shift) or decrease (inward shift) in the quantity level desired for a specific price; while a change in the price of a substitute, could result in an outward shift if the price of the substitute increases and an inward shift if the substitute's price decreases.

• Properties of Indifference Curves

  • Indifference curves trace the combination of goods that would give a consumer a certain level of utility.
  • This is based on the assumption that a consumer is always better off consuming more of a good, so as quantity consumed of one good increases, total satisfaction would increase if not offset by a decrease in the quantity consumed of another good.
  • This also assumes that the marginal rate of substitution is always positive.
  • It is technically possible for indifference curves to be perfectly straight as well, which would imply that the two goods are identical (perfect substitutes).
  • Similarly, all indifference curves will naturally identify diminishing rates of substitution as the quantity increases for a certain good compared to another, and can create demand projections of prospective supply.