Wednesday, January 14, 2009

What is a Commodity?

Commodity is a word that most everybody has heard but may not really know what it is or how it has any impact on their daily life. Below is a brief explanation and example of a commodity and why you should know what it means.

According to,:

. an article of trade or commerce, esp. a product as distinguished from a service.

Stock Exchange. any unprocessed or partially processed good, as grain, fruits, and vegetables, or precious metals.

Cheap? No. 100% Free. Trade stocks for free on The Free Trading Community.

Talk about vague... Here is a easier explanation. We are remodeling our kitchen. My wife wanted the Grohe K4 faucet to replace our existing one. I looked it up and the MSRP was pretty high, so we asked our contractor to see what his best price was. Even then, it was pretty pricey, so I looked on Voila! They had the faucet and it was almost half of MSRP. I verified the part code to insure it was the right one, and purchased it.

The K4, whether sold by a retailer, supplier, or Costco is exactly the same. As a consumer, I spent a little time to find the best price, in other words, had full information, and made the decision where to buy it on price alone.

A product that is differentiated by price alone can be defined as a commodity. Another example of this would be of onions in the grocery store. An onion is an onion, regardless of where you buy it.

While it seems simple to think people comparison shop, many don't. With the availability of information via the internet, there is almost no excuse not to. However, a person may pay more for a commodity if the seller provides some service.

I traded taking the faucet home that day for waiting until it gets shipped. That onion that costs $.02 more a pound may come from the closest grocery store. People consume not just goods, but the conditions that surround the good (convenience, timeliness, returnability, utility, etc.). Many of these decisions are subconscious and provide little value. However, once one begins thinking about why they purchase things, one becomes a more efficient consumer. Click here to visit

A commodity is a good that is differentiated by price alone. However, even though a good is a commodity, it doesn't mean that it is priced the same, as the seller may offer some service around the good. Why am I writing about this? I am writing about this so people can better understand and articulate why they make economic decisions, and further hoping they will make better decisions in the future.

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