Talk:Substitute good/Archives/2015

Complaint

There is no criticism of this theory. All forms of energy are not immediately good substitutes. Energy can be stranded by flows. Energy of different types cannot be easily put into different machines. Cars run on gasoline are not run by nuclear reactors readily. The final critique is that if energy available to a society declines then there is absolutely no replacement for energy. Therefore, the Law of Substitute can only function if there is surplus of another replacement form of energy. — Preceding unsigned comment added by 128.32.166.162 (talk) 21:22, 15 March 2012 (UTC)

how to use income effect and subtitution effect to define prefect substitute??

For perfect substitutes, the indifference curve is linear. It is parallel to the budget constraint if the price ratio is equal to the marginal rate of substitution, so there is no unique tangential point and both goods may be consumed in any combination. If the slopes differ, it is only one good that is consumed. But don't confuse the definition of perfect substitutes with the optimal consumption choice, which are mere implications.

A change in income will be entirely income effect because it is a parallel shift of the budget constraint. A change in price will be entirely substitution effect because everyone will flock to the cheaper good.

It is probably better to define it using Cross Price Elasticity of Demand. The Cross Price Elasticity of Demand for perfect substitutes is positive infinity.

I'm thinking CD's and Cassette's are a lot close to perfect substitute goods than is implied here. Wine and Beer are pretty good substitute goods, and they are pretty different.

A constant marginal rate of substitution does not mean that a price change leads to equal amounts of cola and pepsi consumed before and after the price change. That depends on prices, given that the same budget existed before and after the price change.