What do understand by substitute goods

Answer :

Substitute goods are those goods which satisfy the same type of demand and hence can be used in place of one another like tea and coffee or ball pen and ink pen.In case of such goods increase in the price of one causes increase in demand for the other and decrease in the price of one cause the decrease in the demand for the other.

Substitute goods show direct relation between each other i.e quantity demanded of one good is positively related to the change in the price of the other good. For example if the price of coffee rises, consumer will shift from consumption of coffee to the consumption of tea (to avoid extra expense)as both provide same level of satisfaction.

Price of coffee- rises , demand for tea- rises

Price of coffee- falls , demand for tea- falls

( Read: factors affecting demand- substitute goods )

Factors affecting Price Elasticity of Demand

It is important to know that demand for some goods is more elastic (e_p>1, percentage change in quantity demanded is more than percentage change in price) while for others it is less elastic (e_p<1, percentage change in quantity demanded is less than percentage change in price), depending on many factors.

Some of the important determinants of price elasticity of demand are:

1) Nature of commodity :

Nature of commodity refers to whether the commodity is ‘necessary’, ‘luxury’ or ‘comfort’ in nature.

‘Necessary’ commodities, such as food items are essential for existence, these goods have to be purchased in fixed quantities, whether the price is high or low.

A change in the price of the necessities may have a small impact on the demand i.e. have inelastic demand (e_p<1).

‘luxury’ or ‘comfort’ commodities, such as television, a.c, furniture etc are not necessary for existence and their consumption can be postponed. Thus their demand changes by larger amount due to a small change in price i.e. have elastic demand (e_p>1).

The demand for necessities is inelastic and the demand for luxuries and comforts is elastic.