It might start at a gas station.

You stop to fill up your car, look at the price, and work out in your head how much you’ll pay this month if it stays where it is.

But this time, instead of asking, “Will I pay more?”, imagine asking yourself a different question:

Will the cost of gasoline make me think differently about the car I already drive?

That’s when rising gasoline prices become a story that isn’t just about gasoline.

If driving a gasoline-powered car becomes more expensive, some consumers may start taking another option, such as an electric car, more seriously.

This is an entry point to a basic economic concept covered by Dr. @فائق العكايلة in a lesson on the determinants of demand in the Managerial Economics course at Al Yamamah University: the prices of other goods can change demand for the good being studied.

When another product competes with yours

Not all products in the market compete in the same way.

Some products can be used in place of one another to serve a similar purpose. The lesson calls these substitute goods: goods that can be used in place of each other because they fulfill much the same purpose.

Turkish coffee and Cambodian coffee are the example used in the lesson.

If the price of Cambodian coffee rises while the price of Turkish coffee stays the same, Cambodian coffee becomes relatively more expensive. In the classroom example, this increases demand for Turkish coffee. If the price of Cambodian coffee falls, the quantity demanded of Turkish coffee decreases.

The same idea can be understood through a situation closer to everyday life.

When one option becomes more expensive, consumers start reconsidering the others.

A car doesn’t have to get cheaper for demand to rise

This is the most important point.

Suppose the price of an electric car doesn’t change.

It still costs the same.

But owning a gasoline-powered car has become more expensive for the consumer.

If consumers see the two cars as alternatives for meeting the same need—getting around—a change in the cost of one option may lead them to reassess the other.

Demand for electric cars may then rise even though their price hasn’t fallen.

This is an important observation because we’re used to linking an increase in demand to a fall in the price of the product itself.

But demand theory is broader than that.

The lesson explains that the price of the good itself and the prices of other goods are distinct factors that affect demand.

The price changed—but the entire demand curve shifted

In an earlier article, the question was: What happens when the price of coffee itself changes?

There, we discussed moving from one point to another along the demand curve.

This is a different story.

If the price of a substitute good rises, demand for the good being studied increases, shifting its demand curve to the right. If the price of the substitute falls, demand for it decreases, shifting the demand curve to the left.

The distinction between these two cases is very important.

If the price of the electric car itself rises, we look at how the car’s price affects the quantity demanded.

But if the cost of an alternative rises, we ask how the price of another good affects demand for the car.

Economically, these are two different mechanisms.

Your real competitor isn’t always the car parked next to yours

When we talk about competition, we tend to think of products that are very similar.

But from a consumer’s perspective, a competitor can be any option that serves the same purpose reasonably well.

If you need to get from home to work, you may have several options.

Your own car.

A taxi.

Another form of transportation.

Or even postponing trips you don’t consider necessary.

Here, economics isn’t concerned only with the name of the product.

It asks:

Can this product replace another one in the consumer’s eyes?

If the answer is yes, a change in the price of one may affect demand for the other.

That’s why businesses keep an eye on their competitors’ prices

If you ran a company that made a particular product, your own product’s price wouldn’t be the only number worth tracking.

If a competing product’s price rises, your products may become more attractive.

If your competitor cuts its price, the opposite may happen.

That’s why the prices of other goods are among the determinants of demand that should be factored into business decisions.

The lesson gives a clear example: with the price of Turkish coffee unchanged, if the price of Cambodian coffee rises from 21 to 30 riyals per kilogram, demand for Cambodian coffee falls, while demand for Turkish coffee rises from 1,000 to 1,200 kilograms per week.

Consumers don’t need an official announcement telling them, “Change what you buy.”

A change in prices is enough to make them recalculate for themselves.

But not all goods are substitutes

This is why it’s important not to use the concept too loosely.

If two products are used together to provide a particular benefit, they are not substitutes; they are complementary goods.

The lesson explains that the relationship is different in this case: a rise in the price of one complementary good leads to a fall in demand for the other, and vice versa.

Imagine, for example, a device that needs another product to be used as usual.

If the cost of one goes up, owning the other may become less appealing.

So the economic question becomes:

Are the two goods competing for the consumer’s choice, or does the consumer need them together?

The answer changes the direction of the relationship between prices and demand.

Why does this matter to Saudi consumers?

Because every day, we face choices competing for the same budget.

Consumers don’t look at the price of one product in isolation.

They compare.

One restaurant with another.

One brand with another.

Buying something new with repairing the old one.

One car with another.

And different options that meet the same need.

When the price of one of these options changes, the appeal of the others may change too, even if their prices or quality haven’t.

That’s exactly what makes substitute goods a practical concept, not just a term in an economics textbook.

Sometimes the market moves because something else changes price

It may seem strange for demand for a product to rise when its price hasn’t changed.

But now the reason is clear.

If the price of a substitute good rises, that substitute becomes more expensive, and some consumers switch to the other product.

Demand for the other product rises.

Not because its price has fallen.

And not because the product has changed.

But because the alternative has become less attractive.

Dr. @فائق العكايلة explains this idea in the lesson through the classroom example of Turkish and Cambodian coffee: when the price of a substitute rises, demand for the other good increases even though its price stays the same.

When the price of a substitute changes, the landscape changes

Consumers may not change their minds because the product they prefer has become cheaper.

Sometimes they change their minds because the other option has become more expensive.

That’s the power of the concept of substitute goods: it explains many decisions that might initially seem unrelated.

The price of one product rises.

The consumer compares the options again.

Their choice changes.

Then the quantity demanded of another product changes.

And through the combined effect of these individual decisions, the market shifts.

So when we see demand for a good rise, we don’t necessarily need to look only at its own price to find the reason.

Sometimes the answer lies somewhere else entirely:

In the price of the alternative competing for the consumer’s choice.

Disclaimer: (This material was prepared under the supervision of a Yamamah Insights editor with the assistance of artificial intelligence tools for financial education purposes. It is not a recommendation to buy, sell, or hold any security, and it expresses the views of its authors, not those of the platform.)