What Are Economic Values?

Economic values are concepts applied to goods and services to determine their price and the valuation that individuals make of it. For example, the economic values ​​of a car would be the price for which it can be purchased and the social status that its purchase can entail.

These concepts are useful for evaluating an individual’s economic choices. That is, measures of economic value are based on what people want, even when they are not very aware of what they really want.

Economic values

The theory of economic valuation is based on individual preferences and choices. People express their preferences through the choices they make based on their income or their available time.

Josh Kaufman, author of the personal MBA book (2010), explains that merchants must find out what their potential customers value most about a good or service, rather than the economic power they possess.

Kaufman identifies nine common economic values ​​that people typically consider when evaluating a potential purchase: Effectiveness, Speed, Reliability, Easy to use, Flexibility, State, Aesthetic Appeal (aesthetic), Emotion and finally Cost.

Kevin Mayne, for his part, indicates that things that are fast, reliable, easy and flexible are convenient, while things that offer quality, status, aesthetic appeal or emotional impact are high fidelity. These two concepts determine the purchase decision.

Ultimately, how people choose to spend their income and time determines the economic value of a good or service.

Commercial economic values

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Economic value refers to the maximum amount of other things (money, in a free economy and time in a socialist economy), that a person is willing to give for a good or service, compared to what he is willing to give for another good or service.

Market price

This means that the market price of a product refers to the minimum amount that people are willing to pay for it, while the market value is the amount that person would pay to obtain the tangible and intangible benefits of that product.

People will only buy that good if their willingness to pay is equal to or greater than the market price. This also means that two goods that are sold for the same price can have a different market value.

Consumer surplus

Another economic value is the consumer surplus that is related to the law of demand, according to which, people demand less of something when it is more expensive.

This value changes if the price or quality of the good in question changes. That is, if the quality of a good increases, but the price is maintained, the willingness of people to pay may increase and, therefore, the profit or consumer surplus will also increase.

This variation also occurs, if what changes is the price and / or quality of a substitute or complementary good. Economic value is therefore a dynamic value, not a constant.

These changes may indicate alterations in customer needs or change the conditions of competition.

Producer surplus

On the other side is the producer surplus, or economic benefits for the producer of a good or service. This refers to the profit it represents for the producer, receiving a higher price than the price at which he would be willing to sell the good.

Economic value for the customer

The economic value for the customer (EVC) is used to set the prices of products or services, taking into account the tangible (functionality) and intangible (emotions) value that people assign to a product.

There are rational buyers who add up the anticipated benefits of your product, compare them to the costs, and buy the product if it offers enough benefits to justify its price (absolute EVC) or if it offers more value than what another supplier offers (relative EVC).

This value is important because when it is higher than the price of your product, consumers have an incentive to buy it, but if the EVC is lower, then the opposite can happen.

There are three keys to economic value for the client:

  • It should not be equal to the price of the good.
  • It differs from the client’s willingness to pay
  • It varies according to the type of client (segmented according to the needs it wants to satisfy).

In this sense, Jill Avery, a professor at Harvard Business School, affirms that people, when buying a product, usually satisfy these types of needs.

  • Functional (or utilitarian)
  • Social
  • Expressive (or symbolic)
  • Recreational

Other economic values

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Total value of a company’s physical assets when it goes out of business

Assets are property, real estate, fixtures, equipment, and inventory. This valuation is usually done at four levels: market value (perception), book value (the one shown on the balance sheet), liquidation value (or expected value of the asset) and salvage value (or scrap).

Economic added value (EVA)

It is a performance measure of internal management that compares the net operating profit with the total cost of capital. This value is used as an indicator of the profitability of the company’s projects.

The idea behind EVA is that the profitability of a company is measured by the level of wealth it generates for its shareholders. This measurement is limited to a specific period of time so it cannot be taken to make predictions about the future performance of that organization.

Economic value of university degrees

It refers to the difference in the economic valuation that certain university degrees receive compared to others. For example, those who specialize in fields such as science, technology, engineering and mathematics, could be valued better economically than those who study education.

Economic values ​​determine the prices of goods and services consumed in the world, and economists use them to measure the economic benefits of a policy or initiative.

Practical example of economic value

Carmen loses her smartphone and needs to buy another, since her profession as a journalist makes her need one immediately. She does the math and determines that up to € 700 can be spent for a new model.

After analyzing various mobile devices, he finds that there is a model from the Xiaomi brand that brings a series of features and functions that exceed Carmen’s expectations. It has a 6gb RAM, a 256mb internal memory , a 64 mega pixel camera and a 4500mah battery. 

That is to say, this model meets all the practical functionalities (speed, power , efficiency) and also costs € 650, so it also supplements the cost price willing to assume.

However, Carmen finally opts for an iPhone model valued at € 750, assuming paying € 50 more than what she had contemplated. The model has the same characteristics as the Xiaomi, except for the battery which is slightly less than 4000 mah.

Carmen opts for the iPhone because it generates a series of non-tangible economic values ​​such as social status, the emotional bond or the confidence of acquiring a mobile with better advertising than the other.

In both cases, Carmen had on the table different economic values ​​that she was analyzing before deciding on one of the two, finally leaning towards the economic values ​​more linked to status, aesthetic appeal or emotional impact that Kevin Mayne spoke of.

Themes of interest

  • Other examples of economic values .

References 

  1. Economic Value. Recovered from: investopedia.com
  2. Economic Values ​​(s / f). Recovered from: personalmba.com
  3. ecosystemvaluation.org
  4. Financial-dictionary (s / f). Recovered from: investinganswers.com
  5. Gallo, Amy (2015). An update of the economic value for the customer. Recovered from: hbr.org
  6. Maney, Kevin. Trade-Off: Why some things are carried out, and others not.
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