Definiton:

Economic theory describes two goods as being close substitutes if three conditions hold:

  1. products have the same or similar performance characteristics
  2. products have the same or similar occasion for use and
  3. products are sold in the same geographic area

Example:In the diagram on the left, there is a fall in the price of Android Phones causing consumers to demand more. (movement along the demand curve).

  • As a result, there is a fall in demand for the substitute (Apple iPhone) leading to less demand.