Gourt Home::Gourt :: Composite good
A composite good is an abstraction used in economics that represents all other choices of consumption that can be made.
Purpose
A composite good is a concept used in economics to determine opportunity costs in an analysis of a consumer's budget constraint.
Reason for use
Budget constraints 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 market, the cost of a good cannot be related to any other opportunities. Therefore, opportunity costs are not able to be 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 any analysis unwieldy by requiring a multi-dimenstional model. Under these circumstances, economic modelers are forced to choose between goods in order to create a model that is limited in its scope and cumbersome by design.
The concept of the composite good has been created to solve 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 only considered a single good 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.
The final step is completed when the composite good is set to a unit of account such as money by setting the price of the composite good to 1. Since the prices of all other goods are known, the composite good can quickly become converted into any combination of bundles that represent the optimal choice other than the first good. This final step allows the model to be fully applicable to the real world.
See also
"Composite good"