What are substitutes in economic terms?

Substitutes in economic terms refer to goods that can be used in place of one another. This means that when the price of one good rises, consumers may switch to purchasing the other good instead, since it serves a similar purpose or satisfies a similar need. For example, if the price of coffee increases, consumers might choose to buy tea instead, as both beverages provide similar satisfaction to the consumer.

In the context of demand, the existence of substitute goods affects elasticity; the more substitutes available for a product, the more sensitive consumers are to price changes. This concept highlights the competitive nature of markets where similar products vie for consumer preference.