Substitute Goods

Substitute Goods are those goods that can be used to satisfy the same necessity. Substitute goods have positive cross elasticity of demand.

When the price of one good increases, the quantity demanded of the other good increases, because the user can substitute one good for another.

For example, butter and margarine can be used to satisfy the same need. Although, some people will prefer one over the other. In this case, butter and margarine are close but not perfect substitutes.

Perfect substitutes have a cross elasticity that trends to positive infinity. If the price of one increase more than the price of the other, consumers will buy only the cheaper.

Examples of perfect substitute goods are two one-dollar bills or different soybeans of the same quality.