Commodity
A commodity is a tangible good that is interchangeable regardless of the producer. Commodities are almost always an input for the production of other goods.[1] For example, crude oil is essentially the same no matter where it comes from or who produces it. Crude oil from can be made into the same products or used to do all of the same tasks regardless of which country it comes from. On the other hand, a car is not a commodity because cars from different producers do not possess the same capabilities or composition and do not perform the same way. Commodities must be interchangeable. This interchangeability means that commodities are usually produced and traded in bulk.[1]
Commodities are traded according the quality of the good, which means that a standard has to be set. This is referred to as a standardized commodity.[1] This standardization establishes a certain level of quality so that commodities can be traded in advance of any actual transaction. This ensures the quality of the commodity for the buyer and improves the efficiency of transactions so buyers and sellers have a clear expectation about the quality of the good they are purchasing.
Commodity Futures
The guaranteed quality of commodities allows for transactions to be predetermined. Two firms will agree to a transaction at a future date that processes automatically. These transactions are done through a futures market, named as such because firms transact in the present for future exchanges of goods.[2] Future markets make production more efficient as a firm buying the commodity can worry less about the stability or quality of supply. A firm that is selling also benefits from the future transaction because it can worry less about the demand for their product.
Examples of Commodities
Note that all of the commodities below wouldn't change much depending on where they came from, making them interchangeable:
- Oil
- Coal
- Natural gas
- Metals
- Agricultural products such as beef and wheat.
References
- ↑ 1.0 1.1 1.2 "A Dictionary of Economics" published Oxford University Press, 2013. Edited by John Black, Nigar Hashimzade, and Gareth Myles Online version accessed [August 17th, 2017].
- ↑ J.Black, N. Hashimzade, and G. Myles. (2009) "Commodity." [Online], Available: http://www.oxfordreference.com/view/10.1093/acref/9780199237043.001.0001/acref-9780199237043-e-459?rskey=q15zxp&result=1, 2009 [June 28, 2016]