In economics, a commodity is an economic good or service that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. The price of a commodity good is typically determined as a function of its market as a whole: well-established physical commodities have actively traded spot market and derivative markets. Most commodities are , basic resources, or agriculture products, such as iron ore, sugar, or rice.
Non-commodity items such as stereo systems have many aspects of product differentiation, such as the brand, the user interface and the perceived quality. The demand for one type of stereo may be much larger than demand for another.
The price of a commodity good is typically determined as a function of its market as a whole. Well-established physical commodities have actively traded spot market and derivative markets.
Energy commodities include electricity, gas, coal and oil. Electricity has the particular characteristic that it is usually uneconomical to store, and must therefore be consumed as soon as it is processed.
There is a spectrum of commoditization, 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), in markets where energy choice lets a buyer opt (and pay more) for renewable methods if desired. Many products' degree of commoditization depends on the buyer's mentality and means. For example, milk, eggs, and notebook paper are not differentiated by many customers; for them, the product is fungible and lowest price is the main decisive 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 food versus not" or "Free-range eggs versus not" count toward differentiating brands of milk or eggs, and percentage of recycled content or Forest Stewardship Council Certified wood count toward differentiating brands of notebook paper.
Commodities exchanges include:
Commodity market 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.
In order to diversify their investments and mitigate the risks associated with debasement of currencies, and sovereign wealth funds allocate capital to non-listed assets such as a commodities and commodity-related infrastructure.
As society developed, people found that they could trade goods and services for other goods and services. At this stage, these goods and services became "commodities." Commodities are defined as objects which are offered for sale or are "exchanged in a market."Karl Marx, Capital: Volume I p. 36 and "Capital" as contained in the Collected Works of Karl Marx and Frederick Engels: Volume 35, p. 46. In the marketplace, where commodities are sold, "use value" is not helpful in facilitating the sale of commodities. Accordingly, in addition to having use value, commodities must have an "exchange value"—a value that could be expressed in the market.Adam Smith, Wealth of Nations (Pelican Books: London, 1970) p. 131 and David Ricardo, Principles of Political Economy and Taxation (Pelican Books: 1971, London) p. 55.
Prior to Marx, many economists debated as to what elements made up exchange value. Adam Smith maintained that exchange value was made up of economic rent, economic profit, labor economics and the costs of wear and tear on the instruments of husbandry.Adam Smith, Wealth of Nations (Pelican Books: London, 1970) p. 153. David Ricardo, a follower of Adam Smith, modified Smith's approach on this point by alleging that labour alone is the content of the exchange value of any good or service.David Ricardo, Principles of Political Economy and Taxation (Pelican Books: London, 1971) pp. 56-58. While maintaining that all exchange value in commodities was derived directly from the hands of the people that made the commodity, Ricardo noted that only part of the exchange value of the commodity was paid to the worker who made the commodity. The other part of the value of this particular commodity was labour that was not paid to the worker—unpaid labour. This unpaid labour was retained by the owner of the means of production. In capitalist society, the capitalist owns the means of production and therefore the unpaid labour is retained by the capitalist as rent or as profit. The means of production means the site where the commodity is made, the raw products that are used in the production and the instruments or machines that are used for the production of the commodity.
However, not all commodities are reproducible nor were all commodities originally intended to be sold in the market. These priced goods are also treated as commodities, e.g. human labour-power, works of art and natural resources ("earth itself is an instrument of labour"),Karl Marx, Capital: Volume I, p. 179 and "Capital" as contained in the Collected Works of Karl Marx and Frederick Engels: Volume 35, p. 189. 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 RicardoDavid Ricardo, Principles of Political Economy and Taxation (Pelican Books, London, 1971) pp. 56-58. and Karl Rodbertus-Jagetzow among others.
All three of the above-mentioned economists rejected the theory that labour composed 100% of the exchange value of any commodity. In varying degrees, these economists turned to supply and demand to establish the price of commodities. Marx held that the "price" and the "value" of a commodity were not synonymous. Price of any commodity would vary according to the imbalance of supply to demand at any one period of time. The "value" of the same commodity would be consistent and would reflect the amount of labour value used to produce that commodity.
Prior to Marx, economists noted that the problem with using the "quantity of labour" to establish the value of commodities was that the time spent by an unskilled worker would be longer than the time spent on the same commodity by a skilled worker. Thus, under this analysis, the commodity produced by an unskilled worker would be more valuable than the same commodity produced by the skilled worker. Marx pointed out, however, that in society at large, an average amount of time that was necessary to produce the commodity would arise. This average time necessary to produce the commodity Marx called the "socially necessary labour time"Karl Marx, Capital: Volume I, p. 39 and "Capital" as contained in the Collected Works of Karl Marx and Frederick Engels: Volume 35, p. 49. Socially necessary labour time was the proper basis on which to base the "exchange value" of a given commodity.
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. However, Marx held that the value and price of any commodity would coincide only when demand and supply were equivalent to each other.