I am having a hard time figuring out where durable goods fit into consumer/capital goods.
Are durable goods consumer goods? Or capital? Or can some be consumer and some capital?
Especially, I've wondered about cars and houses. Durable capital goods? Or durable consumer goods?
Can someone clear this issue up for me? Thank you!
The following from Man, Economy and State by Murray Rothbard is highly illuminating regarding the nature of durable goods:
Every type of consumers’ good will yield a certain amount of services per unit of time. These may be called unit services. When they are exchangeable, these services may be sold individually. On the other hand, when a good is a physical commodity and is durable, it may be sold to the consumer in one piece, thereby embodying an expected future accrual of many unit services. What are the interrelations among the markets for, and prices of, the unit services and the durable good as a whole? Other things being equal, it is obvious that a more durable good is more valuable than a less durable good, since it embodies more future unit services. Thus, suppose that there are two television sets, each identical in service to the viewer, but that A has an expected life of five years, and B of 10. Though the serv ice is identical, B has twice as many services as A to offer the consumer. On the market, then, the price of B will tend to be twice the price of A. For nondurable goods, the problem of the separate sale of the service of the good and of the good itself does not arise. Since they embody services over a relatively short span of time, they are almost always sold as a whole. Butter, eggs, Wheaties, etc., are sold as a whole, embodying all their services. Few would think of “renting” eggs. Personal services, on the other hand, are never sold as a whole, since, on the free market, slave contracts are not enforceable. Thus, no one can purchase a doctor or a lawyer or a pianist for life, to perform services at will with no further pay ment. Personal services, then, are always sold in their individual units. The problem whether services should be sold separately or with the good as a whole arises in the case of durable commodi ties, such as houses, pianos, tuxedos, television sets, etc. We have seen that goods are sold, not as a total class, e.g., “bread” or “eggs,” but in separate homogeneous units of their supply, such as “loaves of bread,” or “dozens of eggs.” In the present discus sion, a good can be sold either as a complete physical unit—a house, a television set, etc.—or in service units over a period of time. This sale of service units of a durable good is called rent ing or renting out or hiring out the good. The price of the serv ice unit is called the rent. Since the good itself is only a bundle of expected service units, it is proper to base our analysis on the service unit. It is clear that the demand for, and the price of, a service unit of a con sumers’ good will be determined on exactly the same principles as those set forth in the preceding analysis of this chapter. A durable consumers’ good embodies service units as they will accrue over a period of time. Thus, suppose that a house is ex pected to have a life of 20 years. Assume that a year’s rental of the house has a market price, as determined by the market sup ply and demand schedules, of 10 ounces of gold. Now, what will be the market price of the house itself should it be sold? Since the annual rental price is 10 ounces (and if this rental is ex pected to continue), the buyer of the house will obtain what amounts to 20 x 10, or 200 ounces, of prospective rental income. The price of the house as a whole will tend inexorably to equal the present value of the 200 ounces. Let us assume for convenience at this point that there is no phenomenon of time preference and that the present value of 200 ounces is therefore equal to 200 ounces. In that case, the price of the house as a whole will tend to equal 200 ounces. Suppose that the market price of the house as a whole is 180 ounces. In that case, there will be a rush to buy the house, since there is an expected monetary profit to be gained by purchasing for 180 ounces and then renting out for a total income of 200 ounces. This action is similar to speculative purchasers’ buying a good and expecting to resell at a higher price. On the other hand, there will be a great reluctance by the present owners of such houses (or of the house, if there is no other house adjudged by the market as the same good), to sell at that price, since it is far more profitable to rent it out than to sell it. Thus, under these conditions, there will be a considerable excess of demand over supply of this type of house for sale, at a price of 180 ounces. The upbidding of the excess demand tends to raise the price to ward 200. On the other hand, suppose that the market price is above 200. In that case, there will be a paucity of demand to purchase, since it would be cheaper to pay rental for it instead of paying the sum to purchase it. On the contrary, possessors will be eager to sell the house rather than rent it out, since the price for sale is better. The excess supply over demand at a price over 200 will drive the price down to the equilibrium point. Thus, while every type of market price is determined as in the foregoing sections of this chapter, the market also determines price relations. We see that there is a definite relationship be tween the price of the unit services of a durable consumers’ good and the price of the good as a whole. If that relationship is dis turbed or does not apply at any particular time, the actions of individuals on the market will tend to establish it, because pros pects of monetary gain arise until it is established, and action to obtain such gain inevitably tends to eliminate the opportunity. This is a case of “arbitrage” in the same sense as the establish ment of one price for a good on the market. If two prices for one good exist, people will tend to rush to purchase in the cheaper market and sell more of the good in the more expen sive market, until the play of supply and demand on each market establishes an “equilibrium” price and eliminates the arbi trage opportunity. In the case of the durable good and its serv ices, there is an equilibrium-price relation, which the market tends to establish. The market price of the good as a whole is equal to the present value of the sum of its expected (future) rental incomes or rental prices.
Every type of consumers’ good will yield a certain amount of services per unit of time. These may be called unit services. When they are exchangeable, these services may be sold individually. On the other hand, when a good is a physical commodity and is durable, it may be sold to the consumer in one piece, thereby embodying an expected future accrual of many unit services. What are the interrelations among the markets for, and prices of, the unit services and the durable good as a whole?
Other things being equal, it is obvious that a more durable good is more valuable than a less durable good, since it embodies more future unit services. Thus, suppose that there are two television sets, each identical in service to the viewer, but that A has an expected life of five years, and B of 10. Though the serv ice is identical, B has twice as many services as A to offer the consumer. On the market, then, the price of B will tend to be twice the price of A.
For nondurable goods, the problem of the separate sale of the service of the good and of the good itself does not arise. Since they embody services over a relatively short span of time, they are almost always sold as a whole. Butter, eggs, Wheaties, etc., are sold as a whole, embodying all their services. Few would think of “renting” eggs. Personal services, on the other hand, are never sold as a whole, since, on the free market, slave contracts are not enforceable. Thus, no one can purchase a doctor or a lawyer or a pianist for life, to perform services at will with no further pay ment. Personal services, then, are always sold in their individual units.
The problem whether services should be sold separately or with the good as a whole arises in the case of durable commodi ties, such as houses, pianos, tuxedos, television sets, etc. We have seen that goods are sold, not as a total class, e.g., “bread” or “eggs,” but in separate homogeneous units of their supply, such as “loaves of bread,” or “dozens of eggs.” In the present discus sion, a good can be sold either as a complete physical unit—a house, a television set, etc.—or in service units over a period of time. This sale of service units of a durable good is called rent ing or renting out or hiring out the good. The price of the serv ice unit is called the rent.
Since the good itself is only a bundle of expected service units, it is proper to base our analysis on the service unit. It is clear that the demand for, and the price of, a service unit of a con sumers’ good will be determined on exactly the same principles as those set forth in the preceding analysis of this chapter.
A durable consumers’ good embodies service units as they will accrue over a period of time. Thus, suppose that a house is ex pected to have a life of 20 years. Assume that a year’s rental of the house has a market price, as determined by the market sup ply and demand schedules, of 10 ounces of gold. Now, what will be the market price of the house itself should it be sold? Since the annual rental price is 10 ounces (and if this rental is ex pected to continue), the buyer of the house will obtain what amounts to 20 x 10, or 200 ounces, of prospective rental income. The price of the house as a whole will tend inexorably to equal the present value of the 200 ounces. Let us assume for convenience at this point that there is no phenomenon of time preference and that the present value of 200 ounces is therefore equal to 200 ounces. In that case, the price of the house as a whole will tend to equal 200 ounces.
Suppose that the market price of the house as a whole is 180 ounces. In that case, there will be a rush to buy the house, since there is an expected monetary profit to be gained by purchasing for 180 ounces and then renting out for a total income of 200 ounces. This action is similar to speculative purchasers’ buying a good and expecting to resell at a higher price. On the other hand, there will be a great reluctance by the present owners of such houses (or of the house, if there is no other house adjudged by the market as the same good), to sell at that price, since it is far more profitable to rent it out than to sell it. Thus, under these conditions, there will be a considerable excess of demand over supply of this type of house for sale, at a price of 180 ounces. The upbidding of the excess demand tends to raise the price to ward 200. On the other hand, suppose that the market price is above 200. In that case, there will be a paucity of demand to purchase, since it would be cheaper to pay rental for it instead of paying the sum to purchase it. On the contrary, possessors will be eager to sell the house rather than rent it out, since the price for sale is better. The excess supply over demand at a price over 200 will drive the price down to the equilibrium point.
Thus, while every type of market price is determined as in the foregoing sections of this chapter, the market also determines price relations. We see that there is a definite relationship be tween the price of the unit services of a durable consumers’ good and the price of the good as a whole. If that relationship is dis turbed or does not apply at any particular time, the actions of individuals on the market will tend to establish it, because pros pects of monetary gain arise until it is established, and action to obtain such gain inevitably tends to eliminate the opportunity. This is a case of “arbitrage” in the same sense as the establish ment of one price for a good on the market. If two prices for one good exist, people will tend to rush to purchase in the cheaper market and sell more of the good in the more expen sive market, until the play of supply and demand on each market establishes an “equilibrium” price and eliminates the arbi trage opportunity. In the case of the durable good and its serv ices, there is an equilibrium-price relation, which the market tends to establish. The market price of the good as a whole is equal to the present value of the sum of its expected (future) rental incomes or rental prices.
A durable good is any good that is, well, durable. Basically, durable goods wear out slowly and they yield some utility over time. Houses and cars are generally considered durable consumer goods. Capital goods are usually considered those goods that are used in the formal production process (e.g. machinery, factories, office buildings).
In any case, I find the Austrian method of classifying goods to be superior. Higher order goods include all durable consumer goods as well as capital goods. Lower order goods basically are nondurable consumer goods.
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