Goods and Services

A business can be defined as an organization that provides goods and services to others who
want or need them. 

Goods are tangible things that are produced, bought or sold, then finally consumed. Services are
activities that other people or businesses do for you. Services are sometimes referred to as
intangible, in the sense that you can’t touch or handle them.

Most businesses provide a service rather than make goods.  That is particularly true of the small
business sector. Take a flick through the Yellow Pages directory at home to see just how many
small services businesses operate in your locality. These are some important differences in the
skills required to run a business making goods compared with services. Here is a brief
description:

GOODS
Goods requires a production location factory The output from production is stock – which can
be transported and/or stored for future sale Production costs will include the costs or raw
materials and other inputs into the production process Requires close liaison with suppliers.
Quality can built-in to the product through good design and production processes designed to
ensure the right quality is achieved. The production process needs to be in place and working
before goods can be produced.

SERVICES
Services on the other hand are output of individuals and they can be a collective or
individualistic action or performance by an individual. For example a barber or a chartered
accountant is giving individual services. Airlines on the other hand have airplanes which are a
product but travelling by airplanes is a service (airlines are one of the most competitive service
sectors today). The location is where the service is provided – either physically (e.g. a builder) or
virtually (e.g. telesales or via a website) Service is delivered at a point in time. It cannot be
stored. A shop has to be open to sell.  A hairdresser has to be there to cut hair. The main cost of a
service business is the people involved. Services require high levels of customer satisfaction
Quality is measured by the quality of customer service.  Harder to manage and relatively easy to
start a service business, particularly using franchises, where a business format has already been
established.

Economic Goods

An economic good is a good or service that has a benefit (utility) to society. Also economic
goods have a degree of scarcity and therefore an opportunity cost. This is in contrast to a free
good (like air, sea water) where there is no opportunity cost – but abundance. Free goods cannot
be traded because nobody living by the sea would buy seawater – there is no point.

However with economic goods where there is some scarcity and value, people will be willing to
pay for them.

Another feature of an economic good is that if it can have a value placed on the good, it can be
traded in the market place and valued using a form of money.

An economic good will have some degree of scarcity in relation to demand. It is the scarcity that
creates a value people become willing to pay for. It is the scarcity which creates opportunity cost.
– For example, if we pick apples from a tree, it means that other people will not be able to enjoy
them. If we devote resources to mining gold, the opportunity cost is that we can’t devote this
time and effort to growing corn.

Non-Economic Goods

There is much debate over the value of goods such as food, shelter and health care. While these
are economic goods, many argue that necessities for basic survival should be free. Endangered
plant and animal species are also debatable resources. Endangered plant species with medicinal
benefits are economic goods since they are beneficial to humans. Many endangered animal
species, on the other hand, may be considered non-economic goods if they have little or no value
to humans.

Public Goods

In economics, a public good is a good that is both non-excludable and non-rivalrous in that
individuals cannot be effectively excluded from use and where use by one individual does not
reduce availability to others. Gravelle and Rees: "The defining characteristic of a public good is
that consumption of it by one individual does not actually or potentially reduce the amount
available to be consumed by another individual. In a non-economic sense, the term is often used
to describe something that is useful for the public generally, such as education and infrastructure,
although these are not public goods in the economic sense. This is in contrast to a common good
which is non-excludable but is rivalrous to a certain degree.

Examples of public goods include fresh air, knowledge, official statistics, national security,
common language(s), flood control systems, lighthouses, and street lighting. Public goods that
are available everywhere are sometimes referred to as global public goods. There is an important
conceptual difference between the sense of 'a' public good, or public goods in economics, and the
more generalized idea of 'the public good' (or common good, or public interest), the public good
is a shorthand signal for shared benefit at a societal level.

Many public goods may at times be subject to excessive use resulting in negative externalities
affecting all users; for example air pollution and traffic congestion. Public goods problems are
often closely related to the "free-rider" problem, in which people not paying for the good may
continue to access it. Thus, the good may be under-produced, overused or degraded. Public
goods may also become subject to restrictions on access and may then be considered to be club
goods or private goods; exclusion mechanisms include copyright, patents, congestion pricing,
and pay television.

Private Goods
A private good is defined as "an item that yields positive benefits to people that is excludable,
i.e. its owners can exercise private property rights, preventing those who have not paid for it
from using the good or consuming its benefits and rivalrous, i.e. consumption by one necessarily
prevents that of another. A private good, as an economic resource is scarce, which can cause
competition for it. The market demand curve for a private good is a horizontal summation of
individual demand curves.
Unlike public goods, private goods are less likely to have the free rider problem. Assuming a
private good is valued positively by everyone, the efficiency of obtaining the good is blocked by
its rivalry, that is simultaneous consumption of a rivalrous good is theoretically impossible; the
feasibility of obtaining the good is made difficult by its excludability, that is people have to pay
for it to enjoy its benefits.

One of the most common ways of looking at goods in the economy is by examining the level of
competition in obtaining a given good, and the possibility of excluding its consumption; one
cannot, for example, prevent another from enjoying a beautiful view, or clean air.

Merit Goods

 Merit goods are products, such as education, which consumers may undervalue but which the
government believes are good for consumers as they exhibit positive externalities.  Merit goods
would be therefore be under provided in a pure free market economy.  People do not take
account of positive externalities when they decide how much to consume of a good so they may
therefore under consume the good. In other words, there is a divergence between private and
social costs and benefits, as the social benefits accruing to society as a whole from the
consumption of such goods tend to be greater than the private benefits to the individual. This
divergence means that the private market cannot be relied upon to ensure an efficient allocation
of society’s scarce resources. The problem is that individual consumers and producers make their
decisions on the basis of their own, internal costs and benefits, but, from the standpoint of the
welfare of society at large, externalities must be considered. This point can be illustrated in
relation to health care and education.

Demerit Goods

 Demerit goods are goods which have negative externalities resulting from their consumption.
This means that consumption of the goods result in external costs that fall on people other than
those consuming the goods.  An example of demerit good is cigarettes.  Smoking causes
additional health cost (external costs) that is paid by the rest of the population. Demerit goods are
goods which are deemed to be socially undesirable, and which are likely to be over-produced and
over-consumed through the market mechanism. Examples of demerit goods are cigarettes,
alcohol and all other addictive drugs such as heroine and cocaine.
Free Goods

A free good is a good that is not scarce, and therefore is available without limits. A free good is
available in as great a quantity as desired with zero opportunity cost to society. A good that is
made available at zero price is not necessarily a free good. For example, a shop might give away
its stock in its promotion, but producing these goods would still have required the use of scarce
resources. Examples of free goods are ideas and works that are reproducible at zero cost, or
almost zero cost. For example, if someone invents a new device, many people could copy this
invention, with no danger of this resource running out. Other examples include computer
programs and web pages.

Earlier schools of economic thought proposed a third type of free good: resources that are scarce
but so abundant in nature that there is enough for everyone to have as much as they want.
Examples in textbooks included seawater and air.

Scarcity

Scarcity also called paucity is the fundamental economic problem of having seemingly unlimited

human wants in a world of limited resources. It states that society has insufficient productive
resources to fulfill all human wants and needs. Scarcity is at the core of economics, because
without this concept macroeconomic and microeconomic research would be rendered
meaningless.

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