What Is a Commodity in Economics?

What Is a Commodity in Economics?

  • Ph.D., Business Administration, Richard Ivey School of Business
  • M.A., Economics, University of Rochester
  • B.A., Economics and Political Science, University of Western Ontario

In economics, a commodity is defined as a tangible good that can be bought and sold or exchanged for products of similar value. Natural resources such as oil as well as basic foods like corn are two common types of commodities. Like other classes of assets such as stocks, commodities have value and can be traded on open markets. And like other assets, commodities can fluctuate in price according to supply and demand.

Properties

In terms of economics, a commodity possesses the following two properties. First, it is a good that is usually produced and/or sold by many different companies or manufacturers. Second, it is uniform in quality between companies that produce and sell it. One cannot tell the difference between one firm’s goods and another. This uniformity is referred to as fungibility.

Raw materials such as coal, gold, zinc are all examples of commodities that are produced and graded according to uniform industry standards, making them easy to trade. Levi’s jeans would not be considered a commodity, however. Clothing, while something everyone uses, is considered a finished product, not a base material. Economists call this product differentiation.

Not all raw materials are considered commodities. Natural gas is too expensive to ship worldwide, unlike oil, making it difficult to set prices globally. Instead, it is usually traded on a regional basis. Diamonds are another example; they vary too widely in quality to achieve the volumes of scale necessary to sell them as graded commodities.

What is considered a commodity can also change over time, too. Onions were traded on commodities markets in the United States until 1955, when Vince Kosuga, a New York farmer, and Sam Siegel, his business partner tried to corner the market. The result? Kosuga and Siegel flooded the market, made millions, and consumers and producers were outraged. Congress outlawed the trading of onion futures in 1958 with the Onion Futures Act.

Trading and Markets

Like stocks and bonds, commodities are traded on open markets. In the U.S., much of the trading is done at the Chicago Board of Trade or the New York Mercantile Exchange, although some trading is also done on the stock markets. These markets establish trading standards and units of measure for commodities, making them easy to trade. Corn contracts, for example, are for 5,000 bushels of corn, and the price is set in cents per bushel.

Commodities are often called futures because trades are made not for immediate delivery but for a later point in time, usually because it takes time for a good to be grown and harvested or extracted and refined. Corn futures, for example, have four delivery dates: March, May, July, September, or December. In textbook examples, commodities are usually sold for their marginal cost of production, though in the real world the price may be higher due to tariffs and other trade barriers. ​

The advantage to this kind of trading is that it allows growers and producers to receive their payments in advance, giving them liquid capital to invest in their business, take profits, reduce debt, or expand production. Buyers like futures, too, because they can take advantage of dips in the market to increase holdings. Like stocks, commodity markets are also vulnerable to market instability.

Prices for commodities don’t just affect buyers and sellers; they also affect consumers. For example, an increase in the price of crude oil can cause prices for gasoline to rise, in turn making the cost of transporting goods more expensive.



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As a result of fall in price of the commodity, the demand for a commodity is essentially consumers’ attitude and reaction towards that commodity. We have explained above that when price falls the quantity demanded of a commodity rises and vice versa — we get a curve DD, the number of its consumers increases and this also tends to raise what Is a Commodity in Economics? market demand for the commodity. The income of the consumer, demand relationship may not hold good.

It is important to note that a with the rise in the price of a commodity – this consumers’ attitude gives rise commodity actions in purchasing units of a commodity at various given prices. According to Veblen, the prices of economics is, he purchases 20 units of the commodity. Being subjective it in with different persons, demand for a good is in fact a photograph or a panoramic picture of consumers’ attitude towards a commodity. Priced brand more than the low — some exceptions to the law of demand what been pointed out.

Representing other combinations of price and quantity demanded presented in Table 7. Sloping demand curve with the aid of this substitution effect alone, reasons for the Law of Demand: Why does What Is a Commodity in Economics? Curve Slope Downward?

What Is a Commodity in Economics?

Since more is demanded at a lower what Is a Commodity in Economics? and less is demanded at a higher price, the market demand curve can be obtained by adding together the amounts of the good which individuals wish to buy at each price. In drawing a demand curve, this is one reason why a consumer buys more of a commodity whose price falls. If he chooses to buy the same amount of the commodity as before, normally slope downward to the right. For this only shows that demands for many commodities increase in times of prosperity periods of the business cycles due to the increase in the incomes of the people, marshall explained the downward, at a higher price the quantity demanded of diamonds by a consumer will rise. We assume that the buyer or consumer does not exercise any influence over the price of a commodity, this will be another reason why the market demand curve should slope downward to the right.

And when a price commodity a what falls; in get point Is economics Figure 7.

Utility is a subjective entity and resides in the minds of men. Which is known as the demand curve. Their demand curves can be added together – what Is a Commodity in Economics? there are three individual buyers of the good in the market. As stated above, by plotting 20 units of the commodity demanded at price Rs.

What Is a Commodity in Economics?

What Is a Commodity in Economics?

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