Alternative Demand (Substitutes)
Economics notes
Alternative Demand (Substitutes)
➡️ Substitutes are goods or services that can be used in place of one another.
➡️ Substitutes can be either perfect or imperfect. Perfect substitutes are goods or services that are exactly the same, while imperfect substitutes are goods or services that are similar but not exactly the same.
➡️ The demand for a good or service is affected by the availability of substitutes. If there are more substitutes available, the demand for the good or service will decrease.
➡️ The price of a good or service is also affected by the availability of substitutes. If there are more substitutes available, the price of the good or service will decrease.
➡️ The availability of substitutes can also affect the production of a good or service. If there are more substitutes available, producers may choose to produce less of the good or service in order to remain competitive.
What is the impact of alternative demand (substitutes) on the price of a product?
The presence of alternative demand (substitutes) for a product can lead to a decrease in its price. This is because consumers have the option to switch to a substitute product if the price of the original product becomes too high. As a result, the original product's demand decreases, and the producer may lower the price to maintain their market share.
How do firms respond to the presence of alternative demand (substitutes)?
Firms may respond to the presence of alternative demand (substitutes) in several ways. They may lower their prices to remain competitive, improve the quality of their product, or differentiate their product from substitutes. Alternatively, they may choose to exit the market if they cannot compete with the substitutes.
What are the factors that determine the degree of substitution between two products?
The degree of substitution between two products depends on several factors, including the price difference between the products, the availability of substitutes, the quality of the products, and the consumer's preferences. If the price difference between two products is significant, consumers are more likely to switch to the cheaper product. Similarly, if there are many substitutes available, consumers have more options to choose from, making it easier to switch. The quality of the products and consumer preferences also play a role in determining the degree of substitution. If consumers perceive one product to be of higher quality or prefer it for other reasons, they may be less likely to switch to a substitute.