What are substitute goods?

Subsitute goods are goods that could be used for the same purpose and can easily be used as an alternative to each other. The basic theory behind substitute goods is that if the price of one good decreases e.g. due to an increase in supply then demand will fall for the subsitute. This is shown in the diagram below




Equally if price of one good increases, then demand for the subsitute will rise. For example if the price of Pepsi increases then demand for Coke is likely to increase.