CONCEPT OF SUBSTITUTE GOODS

 

 Learning Contents:                                                            

·         Meaning of substitute goods.

·         Characteristics of substitute goods.

·         Types of substitutes- Perfect substitutes and Imperfect substitutes with examples.

Substitute goods

Substitute goods are those goods that can be used in place of each other. Consumers do not find any much difference in the goods and perceive them as the same commodity, such as two brands of tea, soaps, soft drinks, etc. These goods serve the same purpose for the consumers.

Characteristics of Substitute Goods

1.      They provide choices and alternatives to the consumer at the time of purchase.

2.      They serve the same purpose or satisfy the similar need of a consumer.

3.      They are interchangeable.

4.    Demand of one good is affected by the price of another good. For e.g. If the Price of one brand of tea say A  goes up, then the demand for another brand of tea  say B will tend to  increase  as a consumer does not find much difference over the two different brands of tea or assume them similar.

5.    Substitute goods generate competition in the market and as a result, the price fluctuates and may also affect the company’s profitability.

Few Examples of Substitute Goods

• Butter and margarine (check note*)
• Coke vs. Pepsi
• Apples and oranges
• Red Pencil and Blue Pencil
• E-books and regular books
• Dove Soap and Palmolive Soap
• Hindustan Times and The Times of India (Newspapers)

An important thing is to keep in the mind is to what extent the goods are substitutable. A substitute can be perfect or imperfect depending on whether the substitute completely or partially satisfies the consumer. To understand this, we classify the substitutes into perfect substitutes and less perfect substitutes.

 

Perfect substitutes: They are the goods that are perfectly substitutable or can exactly be replaceable. Consumers do not find any difference in such goods as they offer exact or same utility to the consumer. If a consumer has to choose between two perfect substitutes, he will buy the cheapest one. They are often called indistinguishable goods.  An increase in the price of one perfect substitute goods will result in more demand for other cheaper perfect substitute goods.

For e.g. If the price of  one farms’ potatoes  goes up, then the consumer will increase the demand for other farm’s potatoes (price not changed or constant) because he does not finds any difference between these two potatoes produce.

Examples of Perfect substitutes

• Potatoes from two different farms
• Red Pencil and Blue Pencil
• Butters from two different producers
• Gold from two different mines
• Electricity from two different power plants
• Wheat from two different countries
• Compact disks (CDs) from different providers
• Gasoline from two different gas stations
• A4 size papers of  two different paper manufacturing companies

·    Imperfect substitutes: Imperfect substitutes are those goods that are not exactly substitutable as consumers find some degree of difference among such goods. For e.g. two different brands of soaps can be perceived differently by a consumer even if this product category is similar. Another example is Bike and Car. Their purpose of reaching the destination is same but the product category is different altogether. So, consumers perceive them differently. One more example such as two phones – one Android (HTC) one iPhone (Apple). In one sense they are close substitutes but to some consumers entirely different.

Examples of Imperfect substitutes

• Android phone and  iPhone (apple)
• Butters from two different producers
• Bananas and apples
• Beer and wine
• E-Books and Regular Books
• Butter and Margarine

·     Simply, we would say for some consumers, a pair of goods can be perfect substitutes while for others, the same pair of substitutes may be treated as imperfect substitutes. For e.g. a consumer who finds no difference between Beer and wine would consider it as a perfect substitute and vice versa.

Note* Butter is a dairy product made by churning cream. Conversely, margarine is a product designed to imitate butter. While butter is mainly composed of dairy fat, margarine is typically produced from vegetable oils.

 

QUESTIONS BASED ON SUBSTITUTE GOODS

Choose the Correct Answer

1. A substitute is a good

a. of higher quality than another good

b. that is not used in place of another good

c. that can be used in place of another good

d. of lower quality than another good

2. What is the best explanation of substitute goods?

a. A good that a company sends to a customer when it is out of stock of the product ordered

b. A product that replaces a defective one

c. There is no such thing; all goods are unique

d. A good that is similar to another and will be purchased if the other good rises in price

3. People buy more of good 1 when the price of good 2 rises. These goods are

a. Necessity goods

b. Substitute goods

c. Normal goods

d. Complementary goods

4. Which of the following pairs of goods are perfect substitutes?

a. Tea and Coffee

b. Potatoes from two different farms

c. Butter and Ghee

d. Pen and Pencil

5. Which of the following pairs represents imperfect substitute goods?

a. Orange Juice and Pineapple Juice

b. Pen and Pencil

c. E-books and Regular books

d. All of these

Answers:

1. c 2.d 3.b 4.b 5.d

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