What are services? Definition and meaning
Services are the non-physical, intangible parts of our economy, as opposed to goods, which we can touch or handle.
Services, such as banking, education, medical treatment, and transportation make up the majority of the economies of the rich nations. They also represent most of the emerging nations’ economies too.
During the twentieth century, manufacturing and agriculture shrank as a share of economic activity.
Today, over two-thirds of GDP and four-fifths of employment in the **OECD countries are in the services sector. GDP stands for Gross Domestic Product, and OECD stands for Organization for Economic Co-operation and Development.
** The OECD is a unique forum consisting of 35 democracies with market economies. It aims to promote economic growth, prosperity, and sustainable development.
Sometimes, it is difficult to differentiate between a service and a good. For example, in healthcare what is the administration of a drug combined with the diagnosis of a physical condition or disease? In fact, it comprises both goods – medical and diagnostic devices – and services – the expertise of medical professionals.
We can’t store services
When a company provides a service, and the customer has paid for it, there is no transfer of ownership. We cannot transport or store a service.
They only exist while the provider is supplying it and the customer is consuming it. For example, a haircut is a service; you cannot transport or store a haircut.
In fact, the haircut only exists while somebody is cutting your hair.
You cannot touch it
When you pay for a service, you receive something intangible. In other words, you do not get anything solid, i.e., you cannot touch it
The buyer of a service gets something he or she needs. However, the customer does not own any physical, solid, or fixed property resulting from the transaction.
The usefulness or benefits of a particular service are reflected in the purchaser’s willingness to pay for it. Using skill, ingenuity, experience, and resources, service providers benefit consumers.
According to BusinessDictionary.com, services are:
“Intangible products such as accounting, banking, cleaning, consultancy, education, insurance, expertise, medical treatment, or transportation.”
Goods vs. services
Every economy in the world is made up of a combination of goods and services.
Goods are physical, tangible things we produce. We can touch or handle them. People buy or sell and eventually consume them. We can store and transport goods.
If you look around your house, you will see dozens of examples of goods, including your cooker, microwave, washing machine, and dishwasher. Your TVs, computers, smartphones, furniture, and water taps are also goods.
Anything you can touch, which we manufacture, extract from mines, or produce from farming are goods.
If you open your fridge – which is a good – it is full of goods inside that you bought in the supermarket. Somebody made them in a factory or workshop, fished them in a river, lake or sea.
Miners extracted minerals from a mine, and we used them to make goods. Additionally, farmers grew or produced many of the goods in your fridge.
These are activities that other individuals, companies, or government departments do for you.
When you book a hotel room, flight, or vacation, the booking agent is providing a service. You cannot touch or handle that booking, i.e., the booking is an intangible thing, it is abstract. You cannot store or transport that booking.
Each public service that the government provides is for its citizens. Examples include the police force, armed forces, ambulances, paramedics, and the fire brigade. Also, healthcare (in most of the advanced economies) is a service, as are public broadcasting, urban planning, and waste management.
The five I’s of services
Economists often refer to the features of each service as the 5 I’s, which include:
- Intangibility: you cannot touch or handle them. Neither can you transport, stock, manufacture, mine, or farm them.
- Inventory (Perishability): you cannot store them for future use. Once the provider delivers the service, it irreversibly vanishes.
- Inseparability: the provider must deliver the service at the time of consumption. Unlike a good, a service can only be delivered and consumed when the provider is present.
I cannot, for example, have a haircut if the person who cuts my hair is not present.
- Inconsistency: as in ‘variability’. Each delivery of a particular service is never exactly the same as the previous or future ones. Each one is unique, even if the same customer requests the same service.
The haircut I had today may be similar to the one I had two months ago, but it is not 100% identical.
Goods, especially those that come off a production line, are identical. In fact, the first Snickers Bar produced in the factory on Monday morning is identical to the second produced on the same day. Furthermore, they are both identical to all the others the factory produces on Tuesday, Wednesday, etc.
- Involvement: both the consumer and provider of a service participate in its provision. For example, during a haircut, there are two participants – the customer and the hairdresser. Unless both are present, the service is not possible.
Video – goods and services
This Worldwide Videos lesson explains the difference between goods and services. Although it is aimed at kids, in my opinion, it has a very clear and easy-to-understand explanation of the two parts of our economy.