substitute

(noun)

A good with a positive cross elasticity of demand, meaning the good's demand is increased when the price of another is increased.

Related Terms

Examples of substitute in the following topics:

  • 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.
    • 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.
    • Food in general would have an extremely low PED because no substitutes exist.

  • 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.
    • In the case of perfect substitutes, the cross elasticity of demand will be equal to positive infinity .

  • Applications of Principles on Consumer Choices

    • The income effect and substitution effect combine to create a labor supply curve to represent the consumer trade-off of leisure and work.
    • 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 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.

  • Mapping Preferences with Indifference Curves

    • Perfect Substitutes: To understand what a indifference curves will look like when products are perfect substitutes, please see .
    • Perfect substitutes are often homogeneous goods.
    • Perfect Complements: The opposite of a perfect substitute is a perfect complement (see ), which is illustrated graphically through curves with perfect right angles at the center.
    • 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.
    • 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.
    • Movements along a demand curve are related to a change in price, resulting in a change in quantity; shifts is demand (D1 to D2) are specific to changes in income, preferences, availability of substitutes and other factors.

  • Changes in Equilibrium for Shifts in Market Supply and Market Demand

    • This increases the cost of leisure and causes the supply of labor to rise - this is the substitution effect, which states that as the relative price of one good increases, consumption of that good will decrease.
    • In general, at low wage levels the substitution effect dominates the income effect and higher wages cause an increase in the supply of labor.
    • At high incomes, however, the negative income effect could offset the positive substitution effect and higher wage levels could actually cause labor to decrease.

  • Monopoly

    • A monopoly is a market characterized by a single seller of a good with no close substitutes and barriers to entry.
    • There are almost always substitutes or methods of possible entry into a market.
    • There are substitutes for the electricity (KWH) produced by a public utility.
    • However, neither of these can be regarded as a close substitute.
    • The concept of cross elasticity of demand can be used to identify whether two goods are substitutes on not.

  • Properties of Indifference Curves

    • 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.

  • Definition of Perfect Competition

    • Monopoly: An industry structure where a single firm produces a product for which there are no close substitutes.
    • There are close substitutes for the product of any given firm, so competitors have slight control over price.