Value (economics)

From Wikinvestor

The economic value of a good or service has puzzled economists since the beginning of the discipline. First, economists tried to estimate the value of a good to an individual alone, and extend that definition to goods which can be exchanged. From this analysis came the concepts value in use and value in exchange.

My value in use describes what I have to give up to obtain more of a good. I know I will have to reduce my leisure, consumption, savings or investment to obtain more of something. That is the basic trade-off in value.

My value in exchange describes what I have to trade to obtain more of a good, and describes the opportunities available in the market.

Wealth maximization predicts that a person will choose to obtain the good or service in the place where it is cheapest, where the amount given up is the least. Sometimes, it is cheapest to produce it yourself, and other times, it is cheapest to buy it.

Value is linked to Price through the mechanism of exchange. When an economist observes an exchange, two important value functions are revealed: those of the buyer and seller. Just as the buyer reveals what he is willing to pay for a certain amount of a good, so too does the seller reveal what it costs him to give up the good.

Additional information about value is obtained by the rate at which transactions occur, telling observers the extent to which the purchase of the good has value over time.

Said another way, value is how much a desired object or condition is worth relative to other objects or conditions. Economic values are expressed as "how much" of one desirable condition or commodity will, or would be given up in exchange for some other desired condition or commodity. Among the competing schools of economic theory there are differing metrics for value assessment and the metrics are the subject of a "Theory of Value." Value theories are a large part of the differences and disagreements between the various schools of economic theory.