Explain the concept of substitute goods and illustrate the demand relationship between them using graphs.

Substitute goods are products that serve a similar purpose and can be consumed interchangeably. For example, tea and coffee are substitutes, as are butter and margarine.

There is a direct relationship between the price of one substitute good and the demand for the other. If the price of good A increases, consumers will tend to switch to its substitute, good B. This causes the demand for good B to increase, even if its own price remains constant.

To illustrate this relationship, two demand-supply graphs would be used:

• Graph 1 (for Good A): This graph shows the demand and supply for good A. An increase in the price of good A (e.g., from $P_1$ to $P_2$) would lead to a movement along its demand curve, resulting in a decrease in the quantity demanded for good A (e.g., from $Q_1$ to $Q_2$).
• Graph 2 (for Good B): This graph shows the demand and supply for good B, the substitute. Because consumers are buying less of the now more expensive good A, they will switch to good B. This causes the entire demand curve for good B to shift to the right (e.g., from $D_1$ to $D_2$). This shift indicates an increase in the demand for good B at every price level, leading to a higher equilibrium price and quantity for good B.