Two (or more) products for which the demand schedules are related to each other in such a way that an increase in the price of one good (other things being equal) will result in a rightward shift of the entire demand schedule for the other good, so that more of the second good will then be demanded at any given available price of the second good. (By the same token, a decrease in the price of the first good will result in a leftward shift of the entire demand schedule for its substitute, so that less of the substitute good will then be demanded at any given available price for the substitute than before.) This kind of relationship occurs when the two kinds of goods can be consumed or used in place of each other in at least some of their common uses. (Of course, substitutability of one for the other is a matter of degree, ranging from almost perfect interchangeability to only partial interchangeability.) The relative costs of using one good versus its substitute is apt to play a major role in determining which one each user chooses to purchase.

An example of substitutable consumer goods might be compact disks and cassette tapes, both of which can be used as media for selling recorded musical performances to the public, even though there are significant differences between the two in terms of sound quality, durability, and the cost of the equipment needed to play them. Essentially these represent alternative choices for the consumers, and the relative prices of the two alternatives are going to have a lot to do with which way many consumers will go in spending their music budgets. If the price of cassettes suddenly increases a good bit, other things being equal, we can expect cd sales to be larger at any given price than they would have been with cassettes still at the old price.

Examples of substitutable producers' goods might include coal versus natural gas (versus fuel oil versus nuclear fuels versus windmills etc) as alternative means to power generators for producing electricity. If the price of coal increases sharply, one may expect demand for the various substitutes to be greater at any of their given prices than would have been the case if the coal price had remained unchanged. This is because at least some electricity producers will now find it financially worth their while to shift part or all of their electricity production over to these suddenly relatively cheaper technologies. (Another common pattern is for various sorts of skilled or unskilled labor to be fairly substitutable in particular industries for each other and/or for various forms of labor-saving machinery because of the existence of alternative production technologies available for producing the same goods or services. If the price of purchasing electronic teller machines goes down, for example, other things being equal, banks' demand for human bank tellers is likely to be reduced.)

[See also: complementary goods, competition, monopoly, demand, demand schedule]