Commodity


Commodity
Yerba mate (left), coffee and tea (right), all used for caffeinated infusions, are commodity cash crops.

In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services.

The more specific meaning of the term commodity is applied to goods only. It is used to describe a class of goods for which there is demand, but which is supplied without qualitative differentiation across a market.[1] A commodity has full or partial fungibility; that is, the market treats it as equivalent or nearly so no matter who produces it. Petroleum and copper are examples of such commodites.[2] The price of copper is universal, and fluctuates daily based on global supply and demand. Items such as stereo systems, on the other hand, have many aspects of product differentiation, such as the brand, the user interface, the perceived quality etc. And, the more valuable a stereo is perceived to be, the more it will cost.

In contrast, one of the characteristics of a commodity good is that its price is determined as a function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets. Generally, these are basic resources and agricultural products such as iron ore, crude oil, coal, salt, sugar, coffee beans, soybeans, aluminium, copper, rice, wheat, gold, silver, palladium, and platinum. Soft commodities are goods that are grown, while hard commodities are the ones that are extracted through mining.

There is another important class of energy commodities which includes electricity, gas, coal and oil. Electricity has the particular characteristic that it is either impossible or uneconomical to store, hence, electricity must be consumed as soon as it is produced.

Commoditization (also called commodification) occurs as a goods or services market loses differentiation across its supply base, often by the diffusion of the intellectual capital necessary to acquire or produce it efficiently. As such, goods that formerly carried premium margins for market participants have become commodities, such as generic pharmaceuticals and silicon chips.

There is a spectrum of commodification, rather than a binary distinction of "commodity versus differentiable product". Few products have complete undifferentiability and hence fungibility; even electricity can be differentiated in the market based on its method of generation (e.g., fossil fuel, wind, solar). Many products' degree of commodification depends on the buyer's mentality and means. For example, milk, eggs, and notebook paper are considered by many customers as completely undifferentiable and fungible; lowest price is the only deciding factor in the purchasing choice. Other customers take into consideration other factors besides price, such as environmental sustainability and animal welfare. To these customers, distinctions such as organic-versus-not or cage-free-versus-not count toward differentiating brands of milk or eggs, and percentage of recycled content or forestry council certification count toward differentiating brands of notebook paper. Larger considerations can enter these equations, such as systemic socioeconomic unfairness (as poor people point out, "sure, it's easy to buy the expensive food when you've got plenty of money") and deception and authentication (e.g., a brand may greenwash its product and consumers lack practical ways to authenticate the claims).

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Etymology

The word commodity came into use in English in the 15th century, from the French commodité, to a benefit or profit. Going further back, the French word derived from the Latin commoditatem (nominative commoditas) meaning "fitness, adaptation". The Latin root commod- meant variously "appropriate", "proper measure, time or condition" and "advantage, benefit".

Recently, many industry individuals have begun to identify workers' compensation insurance as a commodity.

Commodity trade

In the original and simplified sense, commodities were things of value, of uniform quality, that were produced in large quantities by many different producers; the items from each different producer were considered equivalent. On a commodity exchange, it is the underlying standard stated in the contract that defines the commodity, not any quality inherent in a specific producer's product.

Commodities exchanges include:

Markets for trading commodities can be very efficient, particularly if the division into pools matches demand segments. These markets will quickly respond to changes in supply and demand to find an equilibrium price and quantity. In addition, investors can gain passive exposure to the commodity markets through a commodity price index.

Inventory data

The inventory of commodities, with low inventories typically leading to more volatile future prices and increasing the risk of a "stockout" (inventory exhaustion). According to economist theorists, companies receive a convenience yield by holding inventories of certain commodities. Data on inventories of commodities are not available from one common source, although data is available from various sources. Inventory data on 31 commodities was used in a 2006 study on the relationship between inventories and commodity futures risk premiums.[3]

Commodities in Marxism

In classical political economy and especially Karl Marx's critique of political economy, a commodity is any good or service produced by human labour and offered as a product for general sale on the market. Some other priced goods are also treated as commodities, e.g. human labor-power, works of art and natural resources, even though they may not be produced specifically for the market, or be non-reproducible goods.

Marx's analysis of the commodity is intended to help solve the problem of what establishes the economic value of goods, using the labor theory of value. This problem was extensively debated by Adam Smith, David Ricardo and Karl Rodbertus-Jagetzow among others. Value and price are not equivalent terms in economics, and theorising the specific relationship of value to market price has been a challenge for both liberal and Marxist economists.

See also

Notes

  1. ^ http://beginnersinvest.about.com/cs/commodities/f/whatcommodities.htm
  2. ^ O'Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 152. ISBN 0-13-063085-3. http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4. 
  3. ^ Gorton GB et al. (2008). The Fundamentals of Commodity Futures Returns. Yale ICF Working Paper No. 07-08.

External links


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Look at other dictionaries:

  • commodity — com·mod·i·ty /kə mä də tē/ n pl ties: a class of economic goods; esp: an item of merchandise (as soybeans) whose price is the basis of futures trading Merriam Webster’s Dictionary of Law. Merriam Webster. 1996. commodity …   Law dictionary

  • Commodity — Saltar a navegación, búsqueda Artículo principal: Commodity en inglés Una commodity, en inglés el término original, es un bien o servicio para el que existe demanda, pero que es provisto sin gran aportación de valor por el mercado. Se trata de un …   Wikipedia Español

  • Commodity — Com*mod i*ty, n.; pl. {Commodities}. [F. commodit[ e], fr. L. commoditas. See {Commode}.] 1. Convenience; accommodation; profit; benefit; advantage; interest; commodiousness. [Obs.] [1913 Webster] Drawn by the commodity of a footpath. B. Jonson.… …   The Collaborative International Dictionary of English

  • commodity — early 15c., benefit, profit, welfare; later a convenient or useful product, from M.Fr. commodité benefit, profit, from L. commoditatem (nom. commoditas) fitness, adaptation, convenience, advantage, from commodus suitable, convenient (see COMMODE… …   Etymology dictionary

  • commodity — /koˈmɔditi, ingl. kəˈmHdɪtɪ/ [vc. ingl., propr. «comodità, cosa utile»] s. f. inv. (econ.) materia prima, bene primario …   Sinonimi e Contrari. Terza edizione

  • commodity — [n] merchandise, possession article, asset, belonging, chattel, goods, line, material, object, produce, product, property, specialty, stock, thing, vendible, ware; concepts 338,710 …   New thesaurus

  • commodity — ► NOUN (pl. commodities) 1) a raw material or agricultural product that can be bought and sold. 2) something useful or valuable. ORIGIN Latin commoditas, from commodus convenient …   English terms dictionary

  • commodity — [kə mäd′ə tē] n. pl. commodities [ME & OFr commodite, benefit, profit < L commoditas, fitness, adaptation < commodus: see COMMODE] 1. any useful thing 2. anything bought and sold; any article of commerce 3. [pl.] basic items or staple… …   English World dictionary

  • commodity — 01. Basic [commodities] such as rice and corn are heavily subsidized by the government. 02. The stocks were once a much desired [commodity], but have since lost over 70% of their original value. 03. In the desert, ice is an invaluable [commodity] …   Grammatical examples in English

  • Commodity —    According to Karl Marx, the commodity is the cornerstone of capitalism and commodity production is a key defining characteristic of capitalism. Marx begins his investigation of capitalism in Capital with an analysis of the commodity. A… …   Historical dictionary of Marxism


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