Unit 1.4 - Goods and Services

 Goods & Services

Goods:  Goods are usually tangible (touch or hold) that satisfy human wants, such as pens, salt, apples, and hats. 

Services: Services are activities provided by other people, who include doctors, lawn care workers, dentists, house cleaning, teaching, barbers, waiters, or online servers, a book, a digital video-game or a digital movie.

Difference between Goods & Services

Basis	Goods	Services
Tangibility	Tangible	Intangible
Meaning	Physical Commodity	Process of activities
Storability	Can be stored (not perishable)	Cannot be stored (perishable)
Perishability	Not perishable (durable)	Perish as they delivered
Transferability of ownership	Possible	Not possible
Separability	Production & distribution are done at different times	Production, distribution and consumption are simultaneous process
Standardization	Controlled standard (grade)	Standard (quality) differs

Classification Goods & Services

Goods and services are of many types. However, these can be classified into some broad groups.

1. Normal Goods

A normal good, also called a necessary good, doesn't refer to the quality of the good but rather, the level of demand for the good in relation to income increases or declines.

Normal goods can be defined as those goods for which demand increases when the income of the consumer increases and falls when income of the consumer decreases, price of the goods remaining constant. It has a positive relation with income level of the consumer.

Examples : food items, clothing, and household appliances etc.

Combination	Income (Rs. 000)	Demand for Cloth (Pair/3month)
A	30	1
B	40	2
C	50	4

2. Inferiror Goods

In economics, an inferior good is a good whose demand decreases when consumer income rises (or demand increases when consumer income decreases), unlike normal goods, for which the opposite is observed.

Inferiority, in this sense, is an observable fact relating to affordability rather than a statement about the quality of the good. As a rule, these goods are affordable and adequately fulfill their purpose, but as more costly substitutes that offer more pleasure (or at least variety) become available, the use of the inferior goods diminishes.

Examples

• Cheap groceries (frozen food, instant noodles, etc.)
• Fast food
• Public transportation

Consumers will generally prefer cheaper cars when their income is constricted. As a consumer's income increases, the demand of the cheap cars will decrease, while demand of costly cars will increase, so cheap cars are inferior goods.

Combination	Income (Rs. In Lakhs)	Demand for Second Hand Car
A	1	10
B	2	8
C	3	6

3. Giffen Goods

The term "Giffen goods" was coined in the late 1800s, named after noted Scottish economist, statistician, and journalist Sir Robert Giffen, 837 – 1910.

A Giffen good is a low income, non-luxury product for which demand increases as the price increases and vice versa. Demand for Giffen goods is heavily influenced by a lack of close substitutes and income pressures.

Example: Demand for bread increases when its price level increases because poor people lacked the income to buy meat. (Principles of Economics, Alfred Marshall)

Example: Bread and Meat 

Condition: Lack of close substitute of bread and budget pressure or constraint (Rs. 200)

Spending Rs. 200 on bread and meat alone cannot fill an empty stomach. But from the prescribed budget (Rs. 200), a proper combinations of both bread and meat fills the stomach. 

Combination	Price of Bread (in Rs.)	Demand for Bread
A	10	4
B	15	5
C	20	6

4. Substitute Goods

A substitute good is a good that can be used in place of another for the same purpose. In consumer theory, substitute goods or substitutes are goods that a consumer perceives as similar or comparable, so that having more of one good causes the consumer to desire less of the other good.

For Example: Potatoes from different farms, tea & coffee, beer & wine, apple & oranges, Apple iPad & Samsung Galaxy Tab

The demands for the two goods will be interrelated by the fact that customers can trade off one good for the other if it becomes advantageous to do so.

Combination	Price of Apple iPad ($)	Demand for Samsung Galaxy Tab (in 000)
A	800	10
B	1000	15
C	1200	20

5. Complementary Goods

A complementary good or service is an item used in conjunction (experience joint demand) with another good or service.

When the price of a particular good rises the demand for its complement drops because consumers are unlikely to use the complement alone.

Example: cars & petrol, an iPhone & apps used with it, razor & razor blades, shoe & polish,  

Complementarity may be driven by psychological processes in which the consumption of one good (e.g., Coca-Cola) stimulates demand for its complements (e.g., a Momo). Drinking Coca-Cola increases consumers' willingness to pay for a Momo.

Combination	Price of Coca-Cola (in Rs.)	Demand for Momo (in Plate)
A	50	100
B	40	150
C	30	200

6. Private Goods & Public Goods

Private Goods : Owned by a private individual and one takes all decision regarding these goods.

Excludability : Purchased and consumption by one individual prevents another individual from consuming it. For e.g. airplane rides and cellphones.

Rivalry: Consumption of one unit by one person does decrease available units for consumption by another person. So, there is competition among buyers to get that good. For e. g. food & cloth.

Public goods : Owned by the government and can be collectively used by many individuals at the same time.

Non-excludability : Consumer who refuses to pay cannot be excluded from its use. Once provided, everyone can use the good (free rider problem). For e.g. National Defense, street lighting, highways

Non-rivalry: One person consuming the goods does not reduce the amount available for other to consume. For e. g. Public Garden

BASIS	PUBLIC GOODS	PRIVATE GOODS
Meaning	Provided by the nature or the government for free use by the public.	Manufactured and sold by the private companies to satisfy the consumer needs and wants.
Provider	Nature or government	Manufacturers i.e. entrepreneurs
Consumer equality	Rich and poor are treated equally	Preference to rich consumers
Availability	Readily available to all	Reduces with each consumption
Quality	Remains constant	Varies with ability to buy
Decision	Social choice	Consumer's decision
Objective	Overall growth and development	Profit earning
Traded in Free Market	No	Yes
Opportunity Cost	No	Yes
Free riders' problem	Yes	No
Rivalry	Non-rival	Rival
Excludability	Non-excludable	Excludable
Examples	Police service, fire brigade, national defense, public transport, roads, dams and river	Clothes, cosmetics, footwear, cars, electronic products and food

7. Economic Goods and Free Goods

Economic Goods : Economic goods are those goods which have a price and supply less than demand. In another words, economic goods are those goods which are scarce in supply in relation of its demand. The production of such goods requires the scarce resources and having alternative uses. These goods have benefit to the society and an opportunity cost. It is both private and public goods. 

For example: Land is scarce and is able to producing the sugarcane or rice. If farmer wants to produce rice then he will have to sacrifice to produce sugarcane. 

Similarly, cycle, motor cycle, car, house, food, clothes, computer, etc. are economic goods. Thus, we can conclude that there would no economics if there were no economic goods. In other words, there would not be economics if all goods are free. 

Free Goods : Free goods are also known as noneconomic goods because they are free gift of nature. These goods don not have any market price and supply is unlimited. 

For example: air, water, sunshine, sand, etc. are free gift of nature. However, san lying in near the river is free good but when it is collected in the truck and carried to the town for house construction, it becomes economic goods. 

BASIS	Economic Goods	Free goods
1.	Demand is higher than supply and availability.	Available and abundant in nature.
2.	Requires human efforts for production	Does not require human effort to produce
3.	Has money value or market price	Has no money value or no market price
4.	Can be regarded as wealth in economics	Cannot be regarded as wealth in economics
5.	They are not gift of nature. E.g. table, chairs, bus, car	They are free gift of nature. E.g. sunlight, air, water

Quiz: Types of Goods and Services

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