Substitute

AAA

DEFINITION of 'Substitute'

A product or service that satisfies the need of a consumer that another product or service fulfills. A substitute can be perfect or imperfect depending on whether the substitute completely or partially satisfies the consumer. A consumer might consider Pepsi to be a perfect substitute for Coke, or Land O'Lakes butter to be a perfect substitute for Kerrygold Irish Butter. However, if a consumer sees a difference in these brands, he may see Pepsi and Land O'Lakes as imperfect substitutes, even if economists might consider them perfect substitutes.

INVESTOPEDIA EXPLAINS 'Substitute'

For a product to be a substitute of another good, it must share a particular relationship with that good. When a good's price increases, the demand for its substitute will increase because consumers will go looking for a cheaper alternative. Conversely, when a good's price decreases, the demand for its substitute will decrease. For example, margarine is a substitute for butter because a consumer can meet similar needs by using margarine. So, when the price of butter rises, the demand for margarine will likely increase.

RELATED TERMS
  1. Giffen Good

    A good for which demand increases as the price increases, and ...
  2. Parity Product

    A brand of good that has enough similarities with other brands ...
  3. Oversupply

    An excessive amount of a good or other substance. Oversupply ...
  4. Scarcity

    The basic economic problem that arises because people have unlimited ...
  5. Economics

    A social science that studies how individuals, governments, firms ...
  6. Elasticity

    A measure of a variable's sensitivity to a change in another ...
RELATED FAQS
  1. How would a true market economy ensure that the world never runs out of oil

    The physical supply of oil will never run out in an economic system where prices are allowed to fluctuate based on supply ... Read Full Answer >>
  2. What is the long-term outlook of the metals and mining sector?

    An industry agency council was established by the World Economic Forum in 2014 to serve as an advisory board on the future ... Read Full Answer >>
  3. How does fracking affect oil prices?

    Hydraulic fracturing has helped boost the rate at which oil and gas can be extracted from wells, particularly in the United ... Read Full Answer >>
  4. What are some limitations of the consumer price index (CPI)?

    The consumer price index, or CPI, is considered one of the most fundamental and critically important economic indicators, ... Read Full Answer >>
Related Articles
  1. Fundamental Analysis

    The Green Marketing Machine

    Don't let corporations greenwash their dirty laundry. Learn how to spot a phony.
  2. Entrepreneurship

    Cost-Push Inflation Versus Demand-Pull Inflation

    Gain a deeper understanding of aggregate supply and demand, forces which raise the price of goods and services.
  3. Professionals

    Advertising, Crocodiles And Moats

    Memorable advertising is a brick in the fortress that keeps competitors at bay.
  4. Fundamental Analysis

    The 4 R's Of Investing In Retail

    In retail, successfully managing return on investment (ROI) and other financial indicators is the key to a healthy business.
  5. Economics

    Understanding Supply-Side Economics

    Does the amount of goods and services produced set the pace for economic growth? Here are the arguments.
  6. Entrepreneurship

    2 Key Tactics Retailers Use To Increase Sales

    Many companies use versioning and bundling to increase sales. These strategies can offer value to consumers, but they also mean higher costs.
  7. Retirement

    Economic Indicators To Know

    The economy has a large impact on the market. Learn how to interpret the most important reports.
  8. Personal Finance

    Why Are Tesla Cars So Expensive?

    What makes Tesla cars so expensive? Short supply and pricey parts is a good place to start.
  9. Investing

    Why Are Consumers In Hesitation?

    Diverging monetary policy globally and a stronger dollar continued to be key drivers of the recent underperformance and last week’s tumble in U.S. stocks.
  10. Investing

    What's Marginal Revenue?

    In microeconomics, marginal revenue is the additional revenue generated by increasing sales revenue by one unit. Another way of saying this is that the marginal revenue is the revenue generated ...

You May Also Like

Hot Definitions
  1. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  2. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  3. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  4. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  5. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
  6. Absorption Costing

    A managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption ...
Trading Center