What is a Commodity?

Answer:
A commodity is a good that is either produced

or sold by many different companies or a good that is nearly identical between the companies that produce and sell it.

For example, oil and lumber are commodities because many different companies produce and sell oil; many different companies mill lumber with one plank looking pretty much like any other plank regardless of which company milled it.

On the other hand, a Coach hand bag would not be considered a commodity because Coach hand bags are distinct from other hand bags on the market.

Commodities are traded on markets such as the New York Mercantile Exchange and the Chicago Board of Trade. Examples of typical commodities exchanged include oil, wheat, electricity, sulfuric acid, pork bellies, RAM chips, and bandwidth.

While these products have their own intrinsic value, the value of commodities lies in uniformity. For example, one can assume that a bushel of wheat pooled from several farms will be of same quality as a bushel of wheat pooled from another group of farms. However, if a farmer somehow produces a unique “brand” of wheat, say, chocolate-flavored wheat, he will have differentiated his product and perhaps be able to command a higher price.


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