Elasticity
Elasticity
By definition, substitutes are goods that can replace or be replaced by other goods. If the price of one good goes up, but the price of a good that is similar but different stays the same, the goods are substitutes. There are four main and important factors that derives how products become substitutes. The four factors are: the time period being considered; the degree to which a good is a luxury; the market definition; and the importance of the good in the individual’s budget (Colander, 2013, Chapter 6). Using these factors, we can decide a product’s elasticity and thus, its substitutability.
An example for the time period factor would be during World War 2, rubber and steel products were in high demand for military use, thus restricting the availability to the general public. The result here was that the two products were inelastic because, at the time, there were no good substitutes for them. Over time, however, the products became more elastic with new ways to create rubber and new products that can replace steel. These new products are the substitutes.
The luxury factor can be looked at as if the product is a necessity or a want. There are some things that are considered a necessity, such as medicine for a sick person. The medicine is inelastic. A want would be, for example, toilet paper. The type or brand of toilet paper we use is a choice we make as a want. There are plenty of other types or brands of toilet paper and other substitutes for toilet paper, such as baby wipes. Thus, toilet paper is a substitute because it is elastic.
Market definition helps define what is in a particular market. For instance, the transportation industry has a broad definition and is inelastic because it covers all forms of transportation as a whole. However, if we narrow the definition down to personal transportation, we dismiss forms of transport such as public transportation and limit to our cars,