when you examine the 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 to lower cost substitute to the higher cost one if for example 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 formal economic language x and y are substitutes if demand for x increases when the price of y increases or if there is positive cross elasticity of demand the availability of substitutes are one of porter s 5 forces the others being competition new entrants into the industry the power of suppliers and the power of customers 2examples of substitute goodssubstitute goods are all around us as mentioned above they are generally used for the same purpose or are able to satisfy similar needs for consumers here are just a few examples of substitute goods there is one thing to keep in mind when it comes to substitutes the degree to which a good is a substitute for another can and often will differ 3perfect vs less perfect substitutesclassifying a product or service as a substitute is not always straightforward there are different degrees to which products or services can be defined as substitutes a substitute can be perfect or imperfect depending on whether the substitute completely or partially satisfies the consumer a perfect substitute can be used in exactly the same way as the good or service it replaces this is where the utility of the product or service is pretty much identical for example a one dollar bill is a perfect substitute for another dollar bill and butter from two different producers are also considered perfect substitutes the producer may be different but their purpose and usage are the same a bike and a car are far from perfect substitutes but they are similar enough for people to use them to get from point a to point b there is also some measurable relationship in the demand schedule although an imperfect substitute may be replaceable it may have a degree of difference that can be easily perceived by consumers so some consumers may choose to stick with one product over the other consider coke versus pepsi a consumer may choose coke over pepsi perhaps because of taste even if the price of coke goes up if a consumer perceives a difference between soda brands she may see pepsi as an imperfect substitute for coke even if economists consider them perfect substitutes less perfect substitutes are sometimes classified as gross substitutes 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 price of y increases and the utility derived from the substitute remains constant 1substitute goods in perfect competition and monopolistic competitionin cases of perfect competition perfect substitutes are sometimes conceived as nearly indistinguishable goods being sold by different firms for example gasoline from a gas station on one corner may be virtually indistinguishable from gasoline sold by another gas station on the opposite corner an increase in the price at one station will result in more people choosing the cheaper option monopolistic competition presents an interesting case that present complications with the concept of substitutes in monopolistic competition companies are not price takers meaning demand is not highly sensitive to price a common example is a difference between the store brand and name branded medicine at your local pharmacy the products themselves 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 believing it to be more reputable or of higher quality 4