Editing Substitute good (section)

{{Short description|Economics concept of goods considered interchangeable}}
In [[microeconomics]], '''substitute goods''' are two goods that can be used for the same purpose by consumers.<ref>{{Cite web|title=What are substitute goods? Definition and examples|url=https://marketbusinessnews.com/financial-glossary/substitute-goods-definition-meaning/|access-date=2020-10-20|website=Market Business News|language=en-US}}</ref> That is, a [[consumer]] perceives both goods as similar or comparable, so that having more of one good causes the consumer to desire less of the other good. Contrary to [[complementary good]]s and [[independent goods]], substitute goods may replace each other in use due to changing economic conditions.<ref>{{Cite book|last1=Nicholson|first1=Walter|url=https://edisciplinas.usp.br/mod/resource/view.php?id=1527806|title=Microeconomic Theory: Basic Principles and Extensions|last2=Snyder|first2=Christopher|date=2008|publisher=Thomson/South-Western|isbn=978-0-324-58507-0|location=Mason, Ohio|pages=185|access-date=20 August 2019}}</ref> An example of substitute goods is [[Coca-Cola]] and [[Pepsi]]; the interchangeable aspect of these goods is due to the similarity of the purpose they serve, i.e. fulfilling customers' desire for a soft drink. These types of substitutes can be referred to as close substitutes.<ref name=":2" />

Substitute goods are commodity which the consumer demanded to be used in place of another good.

Economic theory describes two goods as being close substitutes if three conditions hold:<ref name=":2">{{Cite book|last=D. Besanko, D. Dranove, S. Schaefer, M. Shanley|title=Economics of Strategy|publisher=John Wiley & Sons|year=2013|isbn=9781118273630|location=United States of America|pages=168}}</ref>

# products have the same or similar performance characteristics 
# products have the same or similar occasion for use and
# products are sold in the same geographic area
[[File:Cross elasticity of demand substitutes xi xj.svg|thumb|245x245px|Figure 1: If the price of <math>x_i</math> increases, then demand for <math>x_j</math> increases]]

Performance characteristics describe what the product does for the customer; a solution to customers' needs or wants.<ref name=":2" /> For example, a beverage would quench a customer's thirst.

A product's occasion for use describes when, where and how it is used.<ref name=":2" /> For example, orange juice and soft drinks are both beverages but are used by consumers in different occasions (i.e. breakfast vs during the day).

Two products are in different geographic market if they are sold in different locations, it is costly to transport the goods or it is costly for consumers to travel to buy the goods.<ref name=":2" />

Only if the two products satisfy the three conditions, will they be classified as close substitutes according to economic theory. The opposite of a substitute good is a complementary good, these are goods that are dependent on another. An example of complementary goods are cereal and milk.

An example of substitute goods are tea and coffee. These two goods satisfy the three conditions: tea and coffee have similar performance characteristics (they quench a thirst), they both have similar occasions for use (in the morning) and both are usually sold in the same geographic area (consumers can buy both at their local supermarket). Some other common examples include [[margarine]] and [[butter]], and [[McDonald's]] and [[Burger King]].

Formally, good <math>x_j</math> is a substitute for good <math>x_i</math> if when the [[price]] of <math>x_i</math> rises the [[demand]] for <math>x_j</math> rises, see figure 1.

Let <math>p_i</math> be the [[price]] of good <math>x_i</math>. Then, <math>x_j</math> is a substitute for <math>x_i</math> if:  <math>
\frac{\partial x_j}{\partial p_i} >0
</math>.