In economic theory, economic value is simply a measurement of the gain provided to an agent by a product or service. In most cases it is usually defined as relative to unit prices, and the definition is thus “what is the highest price that a particular actor is prepared to pay for my good or service?” The concept of economic value has various other philosophical underpinnings, including the profit motive, utility theory, production theory, and consumption theory.
In practice, however, the concept of what is value can mean different things to different people. For some it is simply a matter of what is profitable for that individual or company in the market. Others base their definition of value in terms of what is fair market value. Still others believe that what is of value is determined by social norms, such as what is considered to be a minimal amount of pain and suffering for a human being or something of that nature. Regardless of which philosophical or theoretical foundation one uses to define what is value, however, there are three primary ways in which a person can assess the value of a commodity.
Practical valuations of what is value are based on market data and the cost of production. Market prices are obviously different from costs of production because they take into account the cost of overhead, labor, transportation, and even what is lost when the process is halted. Practical valuations of what is value therefore require knowledge of what is going into production, what is going out of production, what is not profitable, what is not subject to depreciation, and what is not a good investment. The process of developing and evaluating such information as these cannot be done by anyone other than the individuals who are involved in production, marketing, distribution, and sales. No one can possibly come up with such information without seeing what is happening in the marketplace.
The second way in which value can be evaluated is by means of a categorization system. A categorization system can be used to assign values to different commodities or items on the basis of how they will be used. In cases where one needs to compare different situations, then a categorization system is what is needed. There are two fundamental approaches to categorizing what is value. The first is to use a utilitarian approach and determine what is valuable according to what individuals will buy or sell based on their needs. The second is to use a non-utopian approach and look at what is valuable according to what the future prospecting for that item or commodity may be.
The problem with using an analytical approach to what is of value is that it is subjective. What is good for one person will be seen as worthless by another. Furthermore, what is valuable to one may not be so to another. To complicate things further, the value judgments that one forms will inevitably reflect what is best for the person making the judgment. Thus, value judgments themselves are subjective. Another inherent problem with the analytical approach to what is valued is that it tends to reduce the number of alternatives available to people and to reduce the variety of goods and services available for purchase.
A better way to evaluate what is value is to adopt the price-weighted approach. By combining the use of monetary prices with the use of qualitative variables, Price Weighted Auctions provides a much deeper analysis of what is value. In Price Weighted Auctions, each item is assigned a weight ranging from 0 to 1.0, depending on its market potential. A potential refers to how likely it is to be purchased by a buyer in the open market. Face value, on the other hand, refers to the perceived value of an item. For example, a computer would have a higher face value than say, a set of golf clubs.
One important way to think about what is the value and what is not of value is to remember that the definition of what is valued, at least in the economics literature, is determined by estimating economic value. Economic value is determined by comparing the total income of a product or service produces against the cost of production. There are many approaches to estimating economic value in business practice. The most widely used method in business is to estimate the economic value using return on investment (ROI) or the amount of revenue over cost. Another popular method of estimating economic value in business is to estimate the economic value by using discounted cash flow.
Estimates of what is market value can also be derived from valuing similar items in different markets. For instance, when a car is purchased in the United States and bought abroad, the sale price of that car in the domestic market may be a fair value. However, the cost of overseas transportation to get the car to the purchaser may drive the sale price of that car substantially higher. Estimates of what is market value thus often depend on comparisons of sales prices of similar items across markets. Estimates of what is market value are also sometimes derived from the cost of doing business in one country with a product or service and in another country with the same or a different product or service.