What kind of goods are substitutes?

Substitute goods are defined as products that can replace each other in consumption. This means that when the price of one good increases, consumers may choose to buy the other good instead, thereby demonstrating a direct relationship between the price of one good and the demand for the other. For example, if the price of butter rises significantly, people might opt to purchase margarine instead, as both serve a similar purpose in cooking and spreading. This behavior highlights the essential nature of substitute goods in microeconomic theory, especially in understanding consumer choice and price elasticity.

While other types of goods have different characteristics—such as complementary goods that are typically used together or goods with no price correlation that do not affect each other's demand—substitute goods are specifically linked by their ability to fulfill the same need or desire for consumers. This relationship plays a crucial role in how markets operate and how pricing strategies are developed by businesses.