What Is a Commodity?

How a Commodity Is Defined in an Economic Context

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When an economist, economics professor or economics textbook talks about a commodity, that term refers to a basic, marketable good or service that is produced to meet a demand, whether that be a want or a need. Commodities are also interchangeable with others of the same type.

This is a short and sweet answer; the full definition of commodity is more expansive. Read on to understand the properties of commodities, examples of commodities and more.

Properties of Commodities

In terms of economics, a commodity possesses the following 2 properties. 

First, it is a good that is usually produced and/or sold by many different companies.

Second, it is uniform in quality between companies that produce and sell it. Meaning, one cannot tell the difference between one firm's product and another. This uniformity is referred to as fungibility.

Examples of Commodities

Lumber, oil, and electricity could all be considered commodities, while Levi's jeans would not be, as consumers consider them to be distinct from jeans sold by other firms. Economists call this distinctness, product differentiation.

Price of Commodities

In textbook examples, commodities are usually sold for their marginal cost of production, though in the real world the price is often higher, due to factors such as barriers to entry and firm specific talents (perhaps one firm is more adept at growing oranges than another).

Competitive Markets

One of the assumptions of competitive markets is the presence of many sellers that essentially sell the same product.

Implicitly, this means that competitive markets in a strict economic sense must be markets for commodities.

Commoditization

Commoditization is the process by which the differentiation of a product's supply base is weakened.

Meaning, the good or service becomes less unique.

This can occur if the resources, be it physical or intellectual, that go into creating the product become more widespread and easily acquirable. This typically means that premium margins disappear.

Essentially, commoditization refers to a good or service turning into a generic, fungible commodity.