Types of Goods in Economics

What are Goods?

In economics, goods are the items produced by firms by using factors of production in order to satisfy the needs and wants of customers. They are the end result of production. Goods provide utility when they are consumed. They can be material items or intangible services. In this article, we will explain different types of goods in economics.

Free Goods

Goods which are not scarce and have zero opportunity cost are called free goods.

These goods are not made by using scarce resources, and hence they are unlimited in supply and are not scarce. Free goods have zero opportunity cost since their consumption is not limited by scarcity. Some examples of free goods are air, sea-water, and sunshine. Since economics is the study of scarce resources in relation to the unlimited wants of people, that is why, free goods are not discussed much in economics.

Economic Goods

Goods which are produced by using scarce resources are called economic goods.

These goods are limited in supply. All types of goods discussed in economics, except free goods, are economic goods. The consumption of economic goods involves opportunity cost due to their scarcity. Some examples of economic goods are cars, books, bikes, street lights, medical services, etc. 

Basic Types of Goods

The basic types of goods can be differentiated on the basis of whether they are rival, non-rival, excludable, and non-excludable. Private goods are excludable and rival. Public goods are non-excludable and non-rival. Let’s first define excludability, rivalry, non-excludability and non-rivalry.

Excludability and Rivalry

A good is said to be excludable if its availability or distribution can be stopped to those people who are not paying for it. For example, a smartphone has excludability feature. Only payers will get the smartphone. Non-payers will not get it. 

Rivalry in consumption means that the consumption of good by one person will decrease the quantity left for others. For example, a car has rivalry feature. If one person has bought a car, the number of cars left for others will decrease.

Non-Excludability and Non-Rivalry

A good is said to be non-excludable if its availability or distribution cannot be stopped to those people who are not paying for it. For example, street lights have non-excludability feature. Once the street lights are installed for one person, it is impossible to stop others from using them. 

Non-rivalry in consumption means that the consumption of good by one person will not decrease the quantity left for others. For example, if a person is protected by the national defence, it will not decrease the quantity of national defence for others.

Let’s now define four basic types of economic goods based on the above-defined characteristics.

Private Goods

Private goods are both excludable and rival. This means that their availability or distribution can be stopped to the non-payers (free riders) and their consumption by one person will reduce the quantity for others. Most consumer goods fall into this category. If a person works for a company, it provides private goods to him. Examples of private goods are toys, clothing, event tickets, cars, televisions, food, and drinks.

Public Goods

Public goods are both non-excludable and non-rival. This means that their availability or distribution cannot be stopped to the non-payers (free riders) and their consumption by one person will not reduce the quantity for others. Due to the free-rider problem, price cannot be charged for public goods and hence private firms do not find them profitable to produce. The government or the public sector is responsible for providing the public goods. For example, street lighting, national defense, a flood control system, and a lighthouse.

Club Goods

Club goods are excludable but non-rival. This means that their availability or distribution can be stopped to the non-payers (free riders) and their consumption by one person will not reduce the quantity for others. An example of a club good is a cable television or Netflix subscription; you need to pay for getting the subscription, but any number of people can subscribe simultaneously. Since club goods do not have both the features of a pure public goods or a private good, they fall into the category of quasi-public goods.

Common Goods

Common goods or common resources are non-excludable and rival. This means that their availability or distribution cannot be stopped to the non-payers (free riders) and their consumption by one person will reduce the quantity for others. An example of a common good is a meadow for grazing cattle. Anyone is free to use the meadow, but one person's usage of the meadow reduces the amount of grass left for others. Since common goods do not have both the features of a pure public goods or a private good, they fall into the category of quasi-public goods.

Due to the possibility of overexploitation of common goods (the tragedy of the commons) due to the free access, sometimes, governments try to protect them from overuse. For example, a government could create fishing quotas to prevent overfishing.

Other Types of Goods

Analysts and economists also explained some other types of goods. Most of them are sub-types of private goods. Here are the details:

Merit Goods

Goods which are thought to be beneficial for society and which will be underprovided if left to the private sector, are called merit goods. These goods are under-consumed because their benefits are under-estimated due to lack of information (information failure). Merit goods are thought to be desirable because they have external benefits (positive externalities) and involve market failure . These are the benefits to the rest of society. For example, an inoculation against a contagious disease is a merit good. Other people (the rest of society) will also get health benefits from the inoculation, as they will not now catch the disease from the inoculated person. Education is also an example of a merit good.

Demerit Goods

Goods which are thought to be harmful for society and which will be over-provided if left to the private sector, are called demerit goods. These goods are over-consumed because their harmful effects are under-estimated due to lack of information (information failure). Demerit goods are thought to be undesirable because they have external costs (negative externalities) and involve market failure. These are the harmful effects on the rest of society. For example, cigarette is a demerit good. Other people (the rest of society) will be harmed by the use of cigarettes because of passive smoking. Alcohol, recreational drugs, and unhealthy fast-food are also examples of demerit goods.

Consumer Goods

Goods which are bought by individuals for their personal use are called consumer goods. Consumer goods are also called final goods, finished products, or retail goods. For example, clothing, food products, and appliances are examples of consumer goods. These goods are further categorised into durable and non-durable goods.

Fast-Moving Consumer Goods

These are the goods which consumers buy more frequently. These goods are also consumed quickly. Some examples of these goods are toilet papers, toothpaste, cleaning products, food, and drink products.

Durable Goods

Durable goods last for long periods of time. These goods are opposite to fast-moving consumer goods. People buy durable goods less frequently and make careful decisions before buying them. Some examples of durable goods are kitchen appliances, cars, furniture, etc.

Capital Goods

Goods which are bought by businesses for their business use are called capital goods. The spending of firms on capital goods is called investment. Some examples of capital goods are physical assets like transportation vehicles, machinery for manufacturing, production equipment, and office buildings.

Intermediate Goods

These types of goods are semi-finished and need to undergo processing before firms can sell them to customers. Many goods are either intermediate or final, depending on the context. For example, a car company could insert a car component into an automobile, which would be an intermediate good, or sell the car component to the other consumer as a spare part, which would be a final good. Construction materials, electronic components, and food ingredients are examples of intermediate goods.

Normal Goods

Goods and services for which the demand increases when income of people is increased are called normal goods. During economic growth, when the income of people increases, the demand for normal goods also increases. The income elasticity of demand is positive for normal goods. Some examples of normal goods are garments, furniture and mobiles.

Luxury Goods

A sub-type of private goods that is more expensive than normal goods is called luxury goods. When people’s income rises, they prefer to spend more on luxury goods, but when their income decreases, they prefer to buy fewer luxury goods. Some people shift their trend towards normal goods rather than luxury goods. That is why demand for luxury goods is more volatile as compared to normal goods. Designer clothing, high-performance or customised cars, and organic food are examples of luxury goods.

Inferior Goods

Inferior goods are also private goods and totally opposite to normal and luxury goods. Inferior goods are cheaper than normal goods. For example, canned vegetables, small apartments for married couples, second hand furniture, and generic brands are inferior goods. When consumers face a fall in their income levels, they prefer to buy more inferior goods, but when their incomes rise, they buy high-quality goods. 

Veblen Goods

Goods bought by people for show off purpose are called Veblen goods. For example very expensive mobile phones, very expensive jewellery, antiques, paintings etc. 

Complementary Goods

Those goods that are used with other goods are called complementary goods. For example, TV and DVD player, tooth paste and tooth brush, car and petrol, pen and ink, etc.

Substitute Goods

Those goods that are consumed as an alternative to another good are called substitute goods. For example, Pepsi and Coca Cola, tooth paste and tooth powder, tea and coffee, etc.

Giffen Goods

Giffen goods are those goods for which the demand increases when the price goes up. These goods violate the law of demand and are rare types of goods. The income effect of an increase in price causes people to buy more of these cheap goods as they can’t afford expensive goods. For example, wheat, rice, potatoes, bread are considered Giffen goods in some poor areas.

Income Elasticity of Demand (YED) and Types of Goods

The measure of responsiveness of demand to a change in income of consumers is called income elasticity of demand (YED).

YED and Normal Goods

In the case of normal goods, an increase in income causes an increase in demand. A normal good has a positive income elasticity of demand (YED). But it can be either income-elastic or income-inelastic.

In this graph, the quantity demanded is on the horizontal axis (x-axis) and income is on the vertical axis (y-axis). In the case of normal goods, when income increases, quantity for goods also increases, so income elasticity of demand is positive. This is illustrated by an upward sloping demand curve. 

Luxury Goods

In the case of luxury goods, an increase in income can cause a higher percentage increase in demand, which means that the income elasticity of demand for luxury goods is greater than one. For example, a HD pixel LED is a luxury good. When income increases, people prefer to buy more luxury goods.                      

In this graph, for luxury goods, when income increases, demand increases more than proportionately, so income elasticity of demand is greater than one.

Inferior Goods

In the case of inferior goods, an increase in income causes a decrease in demand. Inferior goods have negative income elasticity of demand (YED). Tesco value bread is an example of an inferior good. When people’s income rises, they prefer buying organic bread rather than this low-quality bread.                      

In this graph, a downward sloping demand curve illustrates the negative relationship between income of consumers and the demand for inferiors good. In this case, when prices increase, demand decreases, so income elasticity of demand is negative for inferior goods.

Conclusion

In conclusion, goods are the items of value which are used by people and firms. Each type of good has its own definition and characteristic. In economics, many different types of goods are discussed and we have tried to cover most of them, if not all. Different goods have different income elasticity of demand as well. Normal goods have positive YED, luxury goods have YED which is positive and also greater than 1, and inferior goods have negative YED.