economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and intera ...

, a composite good is an abstraction that represents all but one of the

goods In economics, goods are items that satisfy human wants and provide utility, for example, to a consumer making a purchase of a satisfying product. A common distinction is made between goods which are transferable, and services, which are not tran ...

in the relevant

budget A budget is a calculation play, usually but not always financial, for a defined period, often one year or a month. A budget may include anticipated sales volumes and revenues, resource quantities including time, costs and expenses, environmenta ...

.* ''Deardorff's Glossary of International Economics''
"Composite good."
/ref>

Purpose

Consumer demand theory shows how the composite may be treated as if it were only a single good as to properties hypothesized about demand. The composite good represents what is given up along consumer's

budget constraint In economics, a budget constraint represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income. Consumer theory uses the concepts of a budget constraint and a preference ...

to consume more of the first good.

Reason for use

Budget constraint In economics, a budget constraint represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income. Consumer theory uses the concepts of a budget constraint and a preference ...

s are designed to show the maximum amount of a good, or combination of goods, that can be purchased by a consumer given a limited budget. In a single-good world, the cost of a good cannot be related to any other opportunities. Therefore,

opportunity cost In microeconomic theory, the opportunity cost of a particular activity is the value or benefit given up by engaging in that activity, relative to engaging in an alternative activity. More effective it means if you chose one activity (for example ...

s cannot be calculated. The addition of one new good to a single-good market allows for opportunity costs to be determined ''only'' in relation to that other good. However, its weakness is that it ignores ''all other possible choices''. Trying to solve this problem by adding even more goods to the market makes analysis unwieldy. Under these circumstances, economic modelers are forced to choose between goods in order to create a simple model. The concept of the composite good addresses this problem. The addition of a composite good in a single-good model (bringing it up to two) allows for ''all'' other opportunities to be accounted for. Since the composite is considered a single good only for purposes of the model, analysis can be made on a two-dimensional graph. Optimal choices represent the bundle of two goods; the first good and the composite. A final step can be taken in relating the composite good to a

unit of account In economics, unit of account is one of the money functions. A unit of account is a standard numerical monetary unit of measurement of the market value of goods, services, and other transactions. Also known as a "measure" or "standard" of rela ...

such as

money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...

by setting the price of the composite good to 1. Since the prices of all other goods are known, the composite good can be converted into any combination of bundles that represent the optimal choice other than the first good. This final step clarifies the relation of the model to the real world where many goods can be stated in terms of money value. In John R. Hicks's classic ''

Value and Capital {{Italic title ''Value and Capital'' is a book by the British economist John Richard Hicks, published in 1939. It is considered a classic exposition of microeconomic theory. Central results include: * extension of consumer theory for individual a ...

'' (1939), a composite good was used to generalize mathematically from consumer demand equilibrium for an individual in the 2-good case to market equilibrium via

supply and demand In microeconomics, supply and demand is an economic model of price determination in a Market (economics), market. It postulates that, Ceteris paribus, holding all else equal, in a perfect competition, competitive market, the unit price for a ...

in the n-good case.

Notes

References

* Hicks, John R. (1939, 2nd ed. 1946). ''

''. {{Goodtypes Goods (economics)

Purpose

Reason for use

See also

Notes

References