Substitute Good - Different Types

Different Types

It is important to note that when speaking about substitute goods we are speaking about two different kinds of goods; so the "substitutability" of one good for another is always a matter of degree. One good is a perfect substitute for another only if it can be used in exactly the same way. In that case the utility of a combination is an increasing function of the sum of the two amounts, and theoretically, in the case of a price difference, there would be no demand for the more expensive good.

In microeconomics, two types of substitutes are being distinguished, gross substitutes and net substitutes. Good is said to be gross substitute of good if

\frac{\partial X_i}{\partial P_Y} >0

Goods X and Y are said to be net substitutes if

\left.\frac{\partial X_i}{\partial P_Y}\right|_{U=const}>0

where is a utility function for the two goods.

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