Table of Contents Expand Table of Contents What Is a Substitute? Consumer Demand Examples Perfect Substitutes Competition FAQs The Bottom Line How Consumers Choose Substitutes By Adam Hayes Full Bio Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the University of Lucerne in Switzerland.Adam's new book, "Irrational Together: The Social Forces That Invisibly Shape Our Economic Behavior" (University of Chicago Press) is a must-read at the intersection of behavioral economics and sociology that reshapes how we think about the social underpinnings of our financial choices. Learn about our editorial policies Updated March 02, 2026 Reviewed by Robert C. Kelly Reviewed by Robert C. Kelly Full Bio Robert Kelly is managing director of XTS Energy LLC, and has more than three decades of experience as a business executive. He is a professor of economics and has raised more than $4.5 billion in investment capital. Learn about our Financial Review Board Fact checked by Kirsten Rohrs Schmitt Definition A substitute product competes with a similar product by meeting the same consumer needs through interchangeable use. Key Takeaways In economics, products are substitutes if the demand for one product increases when the price of the other goes up.Substitutes help create competition and lower prices in the marketplace.A generic product is commonly a substitute for a brand-name item.Substitutes play an important part in price elasticity, as a product's demand may be more sensitive if it has more substitutes. Get personalized, AI-powered answers built on 27+ years of trusted expertise. ASK Investopedia / Xiaojie Liu What Is a Substitute? A substitute is a product or service that can take the place if a consumer has a change in preference. Substitutes provide more choices for consumers and play an important role in a competitive marketplace. For example, if the price of beef is too high, people may turn to chicken as a substitute form of protein. Consumer Demand Substitutes occur when at least two products can be used for the same purpose, such as an iPhone vs. an Android phone. For a product to be a substitute for another, it must share a particular relationship with that good. Those relationships can be close, like one brand of coffee with another, or somewhat further apart, such as coffee and tea. There is a relationship between the demand schedules of substitute products. If the price of a product goes up, the demand for a substitute will tend to increase. This is because people will prefer a lower-cost substitute to a higher-cost item. For example, if the price of coffee increases, the demand for tea may also increase as consumers switch from coffee to tea to maintain their budgets. Conversely, when a good's price decreases, the demand for its substitute may also decrease. In economic language, X and Y are substitutes if demand for X increases when the cost of Y increases, or if there is positive cross elasticity of demand. Examples of Substitute Goods A dollar bill for four quartersCoke vs. PepsiPremium vs. regular gasolineButter and margarineTea and coffeeApples and orangesRiding a bike versus driving a carE-books and print books Perfect Substitutes A perfect substitute can be used the same way as the good or service it replaces. The utility of the product or service is identical. For example, a one-dollar bill is a perfect substitute for another dollar bill. Butter from two different producers can be considered an exact substitute. However, a bike and a car are not perfect substitutes, but they are similar enough for people to use them for transportation. Although an imperfect substitute may be replaceable, consumers see degrees of difference. Consumers and economists may disagree on a perfect vs. imperfect substitute. A consumer may choose Coke over Pepsi—perhaps because of taste—even if the price of Coke goes up. They perceive a difference between soda brands, even if economists consider them perfect substitutes. Less perfect substitutes are sometimes classified as gross or net substitutes by factoring in utility. A gross substitute is one in which demand for X increases when the price of Y increases. Net substitutes are those in which demand for X increases when the cost of Y increases, and the utility derived from the substitute remains constant. Important Price elasticity of demand measures the change in the demand for a product when its price changes. If no substitutes exist, demand remains constant when the price increases, making it inelastic. However, when substitutes are available, the demand for those products will be more elastic. Competition In perfect competition, perfect substitutes are sometimes conceived as nearly indistinguishable goods sold by different firms. Gasoline from a gas station on one corner may be virtually indistinguishable from gasoline sold by another gas station on the opposite corner. When prices increase at one station, people will choose the cheaper option. In monopolistic competition, companies are not price-takers, meaning demand is not highly sensitive to price. A common example is the difference between the generic and name-branded medicine. The products are nearly indistinguishable chemically, but they are not perfect substitutes due to the utility consumers may get—or believe they get—from purchasing a brand name over a generic drug. How Do Substitutes Negatively Affect Corporate Profits? Giving consumers more choices helps generate competition in the market and lower prices as a result. While that may be good for consumers, it may have the opposite effect on companies' bottom line. Alternative products can cut into companies' profitability. What Is a Generic Product? A generic brand lacks a recognized name or logo and is typically sold at lower prices than similar brand-named items. They are substitutes for more expensive brand-name goods. How Can Consumers Substitute Original Equipment Manufacturer (OEM) Parts? OEMs have traditionally manufactured and sold their finished products, like cars, to consumers as brand-name items. However, bills of materials often include alternate, or generic parts that can replace the standard part if it's destroyed. The Bottom Line Consumers often choose substitute products or services if the original item's price increases. Substitutes give consumers more choices and help create competition. Get personalized, AI-powered answers built on 27+ years of trusted expertise. ASK Article Sources Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. EconLog. "Substitute Goods and Reasoning from a Price Change." University of Pennsylvania. "Encouraging Competition Through Generic Drugs." Open a New Account Advertiser Disclosure × The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Read more Economy Economics Guide to Microeconomics Partner Links Open a New Bank Account Advertiser Disclosure × The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.