In economics we often talk about goods and services. They are the most basic products of an economy. Goods are defined as tangible consumable items (e.g. ice cream) while services describe tasks that are performed by individuals for the benefit of others (e.g. teaching). Seems pretty easy, right? Well, if we just look at examples such as ice cream or teaching, yes. But what about made to measure clothing, or dinner at a fancy restaurant? Are those goods or services? The answer is, they are both.
The division of all economic output into goods and services is a simplification. In fact, there is a wide variety of products that are a mix of both goods and services. Therefore, the distinction between goods and services can be seen as a continuum. That means, there are pure goods on one end, pure services on the other end, and a large number of products in between. To locate a product in this continuum we need to look at a number of characteristics to show the difference between goods and services: tangibility, ownership, customer involvement, inventories, and timing.
Tangibility is arguably the most important of those characteristics. Generally speaking, goods are tangible in nature, whereas services are intangible. That means you can physically touch goods, but you can’t touch services. For example, you can touch a pair of shoes (i.e. it’s a good) but you can’t touch a coaching session (i.e. it’s a service). At a restaurant, you can touch the food, but you can’t touch the service you receive from the waitress, so this is a mixture between a good and a service.
Ownership, or more precisely the transfer of ownership is the second characteristic we need to look at. When you buy a good, the ownership of that good is transferred to you. Once you bought it, it’s yours. However, if you buy a service, there is no transfer of ownership. To give an example, let’s assume you need a new bike. You go to the store, pick the one you like best and pay for it. Now it’s yours. Pretty obvious, right? However, let’s assume you want to see the new Batman movie. You go to the cinema, buy a ticket and watch the movie. Is it yours now? Well, unfortunately not.
The customer involvement in the creation of the product is another relevant characteristic. We can assume, the higher customer involvement, the more a product can be considered a service. For example, if you buy a can of Coke, you are not at all involved in the production process. You just buy the finished product. By contrast, if you go to Subway to get a sandwich, you can chose the bread you want, meat, vegetables, and all that other good stuff. Hence, in that case you are actively involved in the creation of the product as a customer.
The presence of inventories is another good indicator to distinguish goods and services. Goods can be produced and stored in inventories, whereas services cannot. To illustrate this, think of your favorite cereal. You will probably find quite a few of those boxes in the cereal aisle at your local Walmart (and even more in their inventory). That’s because cereals have a long shelf life, they are not perishable. Unlike cereals, you cannot stock up on haircuts and get a new one from your storage room whenever you feel like it. You will always have to go to your hairdresser and get one haircut at a time.
Last but not least, the timing of production and consumption can help you characterize products as goods or services. If we look at pure services, production and consumption always happen at the same time, whereas goods are usually not consumed right after being produced. For example, if you are at a concert, you are consuming the music as it is produced. Meanwhile, you are probably wearing clothes that were produced a few weeks, months or even years earlier. In fact, this aspect is highly related to the presence of inventories we talked about above. Services have to be consumed at the same time as they are produced, because they cannot be stored in an inventory.
In a Nutshell
Goods and services are the most basic products of an economy. Goods can be defined as tangible consumable items (e.g. ice cream) while services describe tasks that are performed by individuals for the benefit of someone else (e.g. teaching). However, most goods are not pure goods or pure services, they lie somewhere in between. To locate products in this continuum we can look at a number of characteristics that distinguish goods and services: tangibility, ownership, customer involvement, inventories, and timing.