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Definition: Substitutability

Substitutability refers to the ability of goods or services to be replaced by another good or service in use or consumption. Both the products or services help the customer in fulfilling their needs. The customer can fulfill their needs using either of the two products  or services.

Common examples of substitute goods are tea & coffee, ball pen & ink pen, petrol & diesel, etc. Some popular brands like Coca Cola & Pepsi also act as each others substitutes.

The fact that two products are substitutable has immediate consequences, in that, it binds together the demands of both the products because consumers can trade off one for another if it becomes profitable to do so. In economics, substitute goods have positive cross elasticity of demand. This means that if the price of tea increase, the demand for coffee will increase, and vice-versa.

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