
der Ersatz
replacement
A person or thing that takes the place of another; a substitute or stand-in.
Da der Kaffee aus war, trank sie Tee als Ersatz.
Since the coffee was gone, she drank tea as a replacement.
replacement / compensation
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replacement
A person or thing that takes the place of another; a substitute or stand-in.
Da der Kaffee aus war, trank sie Tee als Ersatz.
Since the coffee was gone, she drank tea as a replacement.

compensation
Compensation or restitution for damage or loss that has occurred.
Die Versicherung leistete finanziellen Ersatz für das gestohlene Fahrrad.
The insurance company provided financial compensation for the stolen bicycle.
The noun 'der Ersatz' (the replacement/compensation) is directly derived from the verb 'ersetzen' (to replace). 'Ersetzen' means to put something in the place of something else. 'Der Ersatz' is therefore the person or thing that takes on this function.
Wir müssen den kaputten Stuhl ersetzen.
We have to replace the broken chair.
You can recognize the meaning from the context. If it is about standing in for a person or thing, 'Ersatz' (replacement) is a substitute. If it is about damage or loss, 'Ersatz' (compensation) is compensation, often in the form of money.
Der verletzte Spieler braucht einen Ersatz.
The injured player needs a replacement.
When 'Ersatz' (replacement) is a substitute, it is very often used with the preposition 'für' (for) and the accusative. This expresses what or who is being replaced.
Gibt es einen Ersatz für den ausgefallenen Flug?
Is there a replacement for the canceled flight?
In the sense of compensation, 'Ersatz' (compensation) is often combined with the verbs 'leisten' (to provide/pay), 'fordern' (to demand), or 'verlangen' (to demand/request). These combinations are typical of formal or legal contexts.
Der Verursacher des Unfalls muss Ersatz leisten.
The person who caused the accident must provide compensation.
option
An Option is a possibility that can be chosen from several offerings. An Ersatz takes the place of something expected or unavailable and performs its function. If the focus is on free choice, Option is the right term; if the original is missing, Ersatz is the right term.

Weil die normale Milch ausverkauft ist, nimmt sie Hafermilch als Ersatz.
Because regular milk is sold out, she uses oat milk as a replacement.
Im Café ist Hafermilch eine zusätzliche Option für den Kaffee.
At the café, oat milk is an additional option for coffee.