Commodity
An economic good with substantial fungibility traded in global markets.
In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: the market treats instances of the good as equivalent or nearly so regardless of who produced them. Commodities are typically raw materials, basic resources, agricultural or mining products, such as iron ore, sugar, grains, crude oil, corn, and gold, and can also include mass-produced unspecialized products like chemicals and computer memory. The price of a commodity is generally determined by its market as a whole, with well-established physical commodities having actively traded spot and derivative markets.
- types
- Hard commodities (mined: gold, silver, copper, oil); Soft commodities (grown: wheat, rice); Energy commodities (electricity, gas, coal, oil)
Lore & Background
In classical political economy and Karl Marx's critique, a commodity is an object or good or service produced by human labor, offered for sale or exchanged in a market. Commodities must have both use value and exchange value. Prior to Marx, economists debated the elements of exchange value: Adam Smith held it comprised rent, profit, labor, and wear and tear; David Ricardo argued that labor alone constituted exchange value. Karl Marx later built on this, introducing the concept of surplus value—unpaid labor retained by the owner of the means of production.
Reader's Guide
The concept of commodity is fundamental to economics and trade, as it describes goods whose market value is determined primarily by supply and demand rather than brand or differentiation. Commodities form the basis of global trade, with exchanges such as the Chicago Board of Trade, London Metal Exchange, and New York Mercantile Exchange facilitating spot and derivative trading. The wide availability of commodities typically leads to smaller profit margins and diminishes the importance of factors other than price. Commoditization—the process by which differentiated products become commodities—affects industries from pharmaceuticals to electronics, as intellectual capital diffuses and premium margins erode. The degree of commoditization exists on a spectrum rather than as a binary distinction; even electricity can be differentiated by generation method (fossil fuel, wind, solar) in markets where buyers can choose renewable sources. Investors gain passive exposure to commodity markets through commodity price indexes, and pension funds and sovereign wealth funds allocate capital to commodities and related infrastructure to diversify investments and mitigate risks from inflationary debasement of currencies.
Did You Know?
- The word commodity entered English in the 15th century from the French commodité, meaning 'amenity, convenience.'
- Karl Marx noted that from the taste of wheat, it is not possible to tell who produced it—a Russian serf, a French peasant, or an English capitalist.
- Electricity has the particular characteristic that it is usually uneconomical to store and must be consumed as soon as it is produced.
- Multivitamin supplements are cited as an example of commoditization, where a 50 mg tablet of calcium is of equal value regardless of the producer.
Frequently Asked Questions
What exactly is a commodity in economics?
A commodity is a basic economic good—typically a raw material or agricultural product—that the market treats as interchangeable regardless of which producer made it. This interchangeability, known as fungibility, is what sets a commodity apart from a branded or specialized product.
What are the main categories of commodities?
Commodities are generally grouped into hard commodities (extracted from the earth, such as gold, copper, and oil), soft commodities (grown, like wheat and rice), and energy commodities (electricity, natural gas, coal, and petroleum).
How is a commodity's price determined?
Because individual units are essentially interchangeable, a commodity's price is set by the overall market rather than by any single buyer or seller. For well-established physical commodities, this price is reflected in actively traded spot markets.
What makes a good qualify as a commodity?
The key criterion is substantial fungibility—meaning the market views one unit as equivalent to another no matter who produced it. Typical examples include iron ore, sugar, corn, crude oil, gold, and even mass-produced items like chemicals or computer memory.
Why do commodities matter in global markets?
Commodities form the foundational inputs for nearly every industry, so their prices ripple through the entire economy. Their fungible, globally traded nature makes them a barometer of worldwide supply, demand, and overall economic health.
More in Economic Concepts & Models 1-24
Elsewhere in the Economic Concepts & Models universe
Spotted an error? Know more?
This is a living reference — every entry is fact-audited, and reader corrections feed straight into our audit queue. Suggest an edit · See this site's audit record