Short answers, pulled from the story.
Substitute goods are two goods that consumers can use for the same purpose, perceiving them as similar enough that having more of one reduces the desire for the other. Classic examples include Coca-Cola and Pepsi, tea and coffee, and butter and margarine. Economists classify them formally using three conditions: similar performance characteristics, similar occasions for use, and sale in the same geographic area.
Perfect substitutes are goods with identical uses, such as butter from two different producers; consumers choose between them purely on price, and a price increase for one brand shifts all its sales to the other brand by exactly the same amount. Imperfect substitutes, such as Coca-Cola and Pepsi, are similar but not identical; consumer preferences mean they do not trade one-to-one, and sellers of imperfect substitutes are in indirect rather than direct competition.
A substitute good is defined by a positive cross-elasticity of demand, meaning that when the price of one good rises, demand for its substitute rises as well. Perfect substitutes have a higher cross-elasticity than imperfect substitutes do. The formula measures the responsiveness of quantity demanded for one good to a price change in another.
Good A is a gross substitute for good B if spending on A increases when the price of B rises; this relationship is not necessarily symmetric. Net substitutes are defined under a constant utility function, and net substitutability is symmetric: if X is a net substitute for Y, then Y is also a net substitute for X. In practice, most goods that are gross substitutes are also net substitutes.
Research across ten sets of foods found that 79.7% of participants believed within-category substitutes would better satisfy their cravings, but this preference is misguided. Within-category substitutes are more similar to the missing food, making their inferiority more noticeable and creating a negative contrast effect. Cross-category substitutes are actually more satisfying unless the within-category option is of comparable quality.
Michael Porter identified the threat of substitution as one of his Five Forces shaping industry profitability. Markets with close or perfect substitutes experience high price volatility, which compresses producers' profits; in perfectly competitive equilibrium, those profits are driven to zero. Monopolistic industries such as gasoline, milk, and airline tickets feature close but imperfect substitutes, pushing firms toward branding and marketing to differentiate themselves.