2.5 : Effect of Related Goods on Demand Curve: Substitutes

Demand in the marketplace is influenced by many factors, one being the availability of substitute goods.

In economics, substitutes are products that consumers can interchangeably use based on:

Availability: The more substitutes available, the higher the chances of consumers switching products.

Price: If the price of a product rises, consumers may opt for a cheaper substitute, assuming all other factors remain constant.

To illustrate, consider air travel and train travel. They serve similar purposes but differ in cost, time, and convenience. If air travel becomes more expensive, some passengers might switch to trains, shifting the demand curve for air travel leftward, indicating reduced demand.

Conversely, if the price of a substitute (train travel, in this case) increases, the demand for the original product (air travel) may rise even if its price remains unchanged. This situation shifts the demand curve for air travel rightward, reflecting increased demand.

Understanding the role of substitutes is crucial for businesses, especially in industries with numerous alternatives. It allows firms to set competitive prices and devise strategies to retain or expand their market share.