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What’s it: Goods refer to tangible products to satisfy our needs and wants. We can physically see it, touch it, and store it for future use. They can be consumer goods for final use or industrial goods such as raw materials, semi-finished goods, and capital goods. Your various items such as clothes, food, drinks, computers, and smartphones are examples.
Another product category is services, which represent intangible products. They have no physical substance; we can only feel the benefits without touching or seeing them.
Importance of goods
Goods are essential for our daily life. Without them, we cannot live. On the other hand, businesses produce them to make us more comfortable meeting our needs and wants. By doing so, they make a profit. And, without business, we have to produce them ourselves.
Why are goods important? It can be seen from two sides: consumers and producers.
Goods have an important function in our life. By consuming them, we can satisfy our needs and wants. Without them, we would return to primitive life, where we relied on nature to live. Imagine no clothes, canned food, soft drinks, computers, or smartphones? What will happen to our life?
On the other hand, by producing goods, businesses make money. Their main motive is profit. They earn money when they succeed in satisfying consumer needs and wants.
With the money, businesses can pay employee salaries, pay off debts, and pay taxes. The rest they distribute as dividends to shareholders and as retained earnings for internal capital.
Types of goods
There are various ways to classify goods. For example, we can categorize them based on who uses them. Another classification may be based on the stage of production, economic life, and elasticity of demand.
Free goods
Free goods are available indefinitely and, therefore, are never scarce. They have no price, and we don’t have to spend money to buy them. An example is a fresh air. To consume them, we do not have to bear the opportunity costs.
Economic goods
Your everyday items such as computers, clothes, food, and beverages are examples of economic goods. They have a price, and as such, their consumption involves an opportunity cost. To get them, you have to buy them. And, when you buy it, it reduces what is available to others.
In addition, if you buy economic goods, you can prevent others from using or consuming them. Sellers can also exclude non-payers from using them. Sometimes we refer to them as private goods.
Common goods
Common goods are rivalrous. When you consume it, it reduces its availability to others.
However, common goods are also non-excludable. You cannot prevent others from using or benefiting from them. Wood in the forest is a good example. If we use them exploitatively, it can lead to the tragedy of the commons.
Club goods
Club goods are excludable and non-rivalrous. Cinema is a good example. Excludable means the seller can exclude some people from using it by charging a price. However, when you have purchased a ticket, it does not reduce the ticket available to others (non-rivalrous).
Public goods
Public goods are non-excludable and non-rivalrous. Non-excludable means they are available to everyone. Sellers or producers cannot exclude non-payers from using them. When you use them, you also cannot prevent others from using them.
Non-rivalrous means when you have consumed a public good, it does not reduce its availability to others. Examples are public parks and street lighting.
Take street lighting for example. It was built by the government and financed through taxes. However, not everyone pays taxes. And, they can still receive the benefits even if they don’t pay taxes, and you can’t stop them. We call them free riders.
Quasi-public goods
Quasi-public goods are semi non-excludable and semi non-rivalrous. Take the highway, for example. At some point, when it has stuck, it is no longer available to new riders. To overcome this, highway operators then apply tariffs, excluding those unwilling to pay for using the highway.
Capital goods
Capital goods are man-made goods to help process inputs into outputs. Examples are production machines, computers, and vehicles. For example, when you buy a laptop, you can use it to create articles or reports. Similarly, companies use machines to produce finished or semi-finished goods.
Consumer goods
Consumer goods are goods for final household consumption and do not require further processing. Some have a long economic life (durable goods) such as furniture and cars. Others have a short economic life (non-durable goods) such as foods and beverages.
Business goods
Business goods are various goods not for final consumption but for producing other goods or providing services. Thus, they contrast with consumer goods, where no further processing is required to obtain their benefits. Raw materials, semi-finished goods, components, and capital goods are examples of business goods. Also known as industrial goods.
Semi-finished goods
Semi-finished goods require further processing. They are also known as intermediate goods. They are for use by businesses, not for final consumption. Take yarn, for example. Businesses need to process them to produce clothing. Another example is flour. We use it to make bread and various cakes.
Finished goods
Finished goods do not require further processing to obtain benefits. They can be consumer goods or capital goods. Clothing, food, drink, and computers are examples. For example, you can use a computer to produce articles without having to assemble the components first.
Commercial goods
Commercial goods are the opposite of consumer goods. We use them to produce other products or services. Examples are commercial vehicles, heavy equipment, and airplanes.
Durable goods
Durable goods have a long useful life, usually three years or more. Therefore, you do not need to buy them often. Examples are cars, household appliances, consumer electronics, and furniture. They are usually expensive and, therefore, require more consideration to buy.
Non-durable goods
Non-durable goods have a short useful life. They are inexpensive and are more often used for everyday purposes. Foods and drinks are examples.
Normal goods
Normal goods have a positive income elasticity. Their demand increases when consumer income increases. Conversely, a decrease in income causes their demand to fall. The two categories of normal goods are necessities and luxury goods.
- Necessities are income inelastic. They have an elasticity of more than zero but less than one. That shows you their demand changes less significantly than the change in income. For example, if a consumer’s income increases by 5%, their demand will only increase by less than 5%.
- Luxury goods are income elastic. They have an income elasticity of demand of more than one. When consumers’ incomes increase, their demand will increase at a higher percentage. For example, when a consumer’s income increases by 5%, their demand will increase by more than 5%.
Inferior goods
Inferior goods have a negative income elasticity. So they were the opposite of normal goods. I mean, when a consumer’s income goes up, their demand goes down.
Examples of inferior goods are noodles and rice for low-income groups. When their income increases, they will consume fewer noodles and rice. However, when incomes fall, such as during a recession, the demand for both increases.
As a note, categorizing an item as “normal” or “inferior” will vary between consumers. It depends on their income level.
Giffen goods
Giffen goods are a specific case for inferior goods. Their demand decreases when the price is lower. Thus, consumers are less interested when their prices drop. This is because the income effect outweighs the substitution effect.
- Substitution effect – if the price of a good falls, consumers want it more and more and switch from its alternative goods. As a result, its demand will increase.
- Income effect – if prices fall, consumers’ real incomes increase. And, because Giffen goods are inferior goods, an increase in income will decrease their demand.
Because the income effect outweighs the substitution effect; as a result, the demand for a Giffen good falls as its price falls.
Veblen goods
Veblen goods are luxury goods. And, the increase in their prices makes them more attractive. Therefore, consumers want them more and more. In this situation, higher prices provide higher utility (satisfaction). Therefore, consumers become more satisfied when their prices rise, increasing their confidence and prestige.
Convenience goods
Convenience goods have high turnover. Consumers buy them regularly, and they are available in many retail stores. Dairy products are an example. They have two subcategories: necessities and impulse goods.
- Impulse goods – consumers buy them spontaneously and require no prior planning. Various items near the cash register, such as candy, are an example. Retailers put them there to entice consumers while they are paying for the product. They buy it when they pay without even thinking about it.
Shopping goods
Shopping goods have a higher unit price than convenience goods. And for that reason, consumers buy them less often. An example is clothing. Consumers need more consideration and planning when buying them.
Specialty goods
Specialty goods have a high price and often require sacrifice to get them. Consumers often recognize their brand name because they are usually well-known. Jewelry and luxury cars are examples. Marketers are usually more careful in marketing them, for example, only targeting the high-end market rather than the mass market.
Fast-moving consumer goods
Fast-moving consumer goods (FMCG) include goods with high turnover. Consumers often buy them to fulfill their daily needs because they are non-durable. Various food products, beverages, detergents, soaps are examples.
