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

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

goods In economics, goods are anything that is good, usually in the sense that it provides welfare or utility to someone. Alan V. Deardorff, 2006. ''Terms Of Trade: Glossary of International Economics'', World Scientific. Online version: Deardorffs ...

in the relevant

budget A budget is a calculation plan, usually but not always financial plan, financial, for a defined accounting period, period, often one year or a month. A budget may include anticipated sales volumes and revenues, resource quantities including tim ...

.* ''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 their given income. Consumer theory uses the concepts of a budget constraint and a preference map ...

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 their given income. Consumer theory uses the concepts of a budget constraint and a preference map ...

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 choice is the value of the best alternative forgone where, given limited resources, a choice needs to be made between several mutually exclusive alternatives. Assuming the best choice is made, ...

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 functions of money. 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 ...

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: m ...

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'' (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#Applications, holding all else equal, the unit price for a particular Good (economics), good ...

in the n-good case.

Notes

References

* Hicks, John R. (1939, 2nd ed. 1946). '' Value and Capital''. {{Goodtypes Goods (economics)

Purpose

Reason for use

See also

Notes

References