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Supply & Demand

Supply & Demand

Substitution Goods

Substitution goods represent another factor influencing demand. A substitution good is one that has a similar utility as another—they both satisfy a similar need. If the cost of the substitution good changes, the demand for our original good will be affected. If the price of Twinkies falls, donut eaters may flock to the vanilla crème filled sponge cake that has been “tantalizing taste buds and filling lunch boxes since 1930.” As a result, our demand curve would shift to the left like this. 

But on the other hand, if the price of Ding Dongs rises, demand for donuts as the now more affordable alternative would rise. Then our demand cure would shift to the right.

Why It Matters Today

Like music?  When you buy a record, do you prefer to purchase a digital download from the internet or a physical CD or vinyl from a music shop?

In economic terms, CDs and digital music files are complementary goods.  The low price for digital downloads (free if you bootleg, a buck or so per song at legit stores like iTunes) has caused demand for more expensive physical CDs to crater.  

In 2000, Americans bought 942 million CDs, spending some $13.2 billion.  Five years later, as digital music boomed, CD sales had fallen to 705 million units and $10.5 billion in sales.

The future, clearly, is in the download market.  Music on shiny silver plastic discs may soon go the way of the 8-track.

Sometimes a Song Says it Better: You Can’t Always Get What You What You Want, by Rolling Stones

The perfect substitution – you can’t always get what you want but sometimes you get what you need.

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