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At an informal level, one good or service is a substitute for another if it can be used to satisfy the same need, or at least a similar need. A pair of goods are said to be substitutes if, holding the utility level constant, a rise in the price of one of them increases demand for the other. Hence, the substitution effect is negative. (If there are only two goods then with convex preferences they must be substitutes, so the definition only has substance when there are three or more goods.) This relation between a pair of goods is contrasted with that of complements where, holding the utility level constant, a rise in the price of one good decreases demand for the other. This is a negative substitution effect. See also perfect substitute.

Subjects: Economics.


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