What is a substitute good?

A substitute good is defined as a product that can replace another product when its price increases. This relationship is based on consumer behavior, where individuals seek alternatives to a good that has become more expensive. For example, if the price of coffee rises significantly, consumers may opt to purchase tea instead, as tea serves as a substitute for coffee. This substitution effect is a fundamental concept in economics, illustrating how changes in price can lead to changes in the quantity demanded of a good.

The rationale behind this choice emphasizes the importance of price sensitivity in consumer choices; when faced with higher costs for a product, consumers will often look for similar goods that can fulfill the same need or desire. Substitutes are crucial for understanding market dynamics, as they can lead to a decrease in demand for the original product’s price increases.