Question

What do you mean by substitute goods? Give examples of two goods which are substitutes of each other.

Hint:

Substitutes satisfy the same want; positive cross-price elasticity is the defining test.

Answer 1

Step 1: Start from the cross-price elasticity formula:
$e_{xy} = \dfrac{\%\ change\ in\ demand\ of\ X}{\%\ change\ in\ price\ of\ Y}$. For substitutes this value is positive.

Step 2: Interpret the sign:
A positive $e_{xy}$ means X's demand moves in the SAME direction as Y's price — Y gets pricier, so buyers switch to X, raising X's demand. This switching behaviour is exactly what "substitute" means.

Step 3: Give concrete real-world pairs:
Tea and coffee (both hot beverages); ballpoint pens of two different but comparable brands. Either pair works because consumers freely swap one for the other when the price gap changes.

Final Answer:
Substitutes are goods with positive cross-price elasticity; examples include tea/coffee and Pepsi/Coca-Cola.