Commodities

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In economics, a commodity is a marketable item produced to satisfy wants or needs. Often the item is fungible. Economic commodities comprise goods and services.

The term commodity is specifically used for an economic good or service when the demand for it has no qualitative differentiation across a market. In other words, a commodity good or service has full or partial but substantial fungibility; that is, the market treats its instances as equivalent or nearly so with no regard to who produced them. As the saying goes, “From the taste of wheat, it is not possible to tell who produced it, a Russian serf, a French peasant or an English capitalist.” Petroleum and copper are other examples of such commodities, their supply and demand being a part of one universal market. Items such as stereo systems, on the other hand, 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.

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, sugar, rice. Soft commodities are goods that are grown, while hard commodities are 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 usually uneconomical to store; hence, electricity must be consumed as soon as it is processed