Published Jan 10, 2023 Perfect substitutes are goods or services that are exactly the same in terms of function but different when it comes to price, quality, or other characteristics. That means they are interchangeable and can be used to satisfy the same need. As a result, the demand for one good or service is negatively correlated with the demand for the other (i.e., unlike perfect complements, which are positively correlated). A common example of perfect substitutes is generic and branded products. For instance, let’s look at the market for painkillers. Both generic and branded painkillers are used to treat the same medical condition and have the same active ingredient. The only difference between them is the packaging and the price. That means if the price of branded painkillers increases, people will switch to the generic version and vice versa. Perfect substitutes are important for economists because they provide a useful tool for analyzing consumer behavior. By studying the demand for substitutes, economists can gain valuable insights into how people make decisions and how they respond to changes in price. This knowledge can then be used to develop better economic models and to make more accurate predictions about consumer behavior. In addition to that, perfect substitutes can also be used to analyze the effects of government policies, such as taxes or subsidies, on the market.Definition of Perfect Substitutes
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Why Perfect Substitutes Matters
Microeconomics