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Only if the two products satisfy the three conditions, will they be classified as close substitutes according to economic theory. The opposite of a substitute good is a complementary good, these are goods that are dependent on another. An example of complementary goods are cereal and milk. An example of substitute goods are tea and coffee.
Examples of substitutes are meat, poultry, and fish; landlines and cellular telephones; airlines, automobiles, trains, and ships; beer and wine; and so on. For example, tap water is a substitute for Coke, but Pepsi is a product that uses the same technology (albeit different ingredients) to compete head-to-head with Coke, so it is not a substitute.
Cross elasticity of demand of product B with respect to product A (η BA): = / / = > implies two goods are substitutes.Consumers purchase more B when the price of A increases. Example: the cross elasticity of demand of butter with respect to margarine is 0.81, so 1% increase in the price of margarine will increase the demand for butter by 0.81
Elasticity of substitution is the ratio of percentage change in capital-labour ratio with the percentage change in Marginal Rate of Technical Substitution. [1] In a competitive market, it measures the percentage change in the two inputs used in response to a percentage change in their prices. [2]
The concept of the elasticity of substitution was developed by two different economists, each with their own focus. One of these economists was John Hicks, who defined elasticity of substitution as the change in percentage in the relative number of factors of production used, given a particular change in percentage in relative prices or marginal products.
For example, if the MRS xy = 2, the consumer will give up 2 units of Y to obtain 1 additional unit of X. As one moves down a (standardly convex) indifference curve, the marginal rate of substitution decreases (as measured by the absolute value of the slope of the indifference curve, which decreases).
Sour cream is another milk substitute similar to yogurt, and it even has the added benefit of tenderizing baked goods (like cake, muffins or quick breads). Keep in mind, though, that it will add a ...
Products that are close substitutes will fulfil the same or a similar function. As an example, a clothesline and a clothes dryer machine have almost identical purpose The occasion of the product refers to when, where and how it is used. Products that are used in similar occasions will have a higher degree of substitutability.