A Basic Description of Commodities

By Ted Rollins , last updated December 22, 2011

The term commodity refers to any good for which there is demand, but for which the quality of the supply is not differentiation between suppliers. That means that the market for any commodity is fungible, or that those who buy a commodity view the product as equivalent no matter who provides it. Oil and gold are two examples of commodities; the price for buying both products is universal and changes based on global supply and demand. However, items like televisions aren't considered commodities, because different brands and sizes are valued differently and thus not considered fungible.

The largest groups of commodities are resources and agricultural commodities like sugar, copper, wheat, iron and soybeans. Other kinds of commodities are energy commodities like oil, gas and electricity. As a product becomes more fungible and loses differentiation, it can become a commodity. This can happen through legal practice as a product loses a patent, as is the case with many electronic parts and generic pharmaceuticals. Deciding whether or not something is a commodity is not always black and white; rather, there is a range across which products are viewed as nonfungible and fungible. One such example is eggs. On a consumer level, some customers view eggs as entirely fungible, and simply pay the lowest possible price without considering quality or history. However, other customers may be willing to pay more for eggs that have been harvested in an environmentally friendly way from chickens that have been fed certain products; for these customers, eggs are much less fungible (and thus less commoditized) than for most other buyers.

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