Economic Value

Published Mar 24, 2023

Definition of Economic Value

Economic value is the maximum amount of money that an individual is willing to sacrifice in exchange for a good or service. This value is influenced by various factors such as scarcity, demand, supply, production cost, quality, and utility.

Example

To understand the concept of economic value, let’s look at the market for smartphones. The price of a high-end smartphone can range from USD 1,000 to USD 1,500 or even more. This price is determined by the perceived value that the phone provides to its customers. For instance, a customer may be willing to pay USD 1,200 for a particular smartphone model because it offers high-speed internet, a great camera, a long-lasting battery, and a comfortable design. In this case, the USD 1,200 represents the economic value of the smartphone to that particular customer.

On the other hand, the production cost of a smartphone also plays a crucial role in determining its economic value. If the production cost of a particular smartphone model is USD 800, the seller has to price the item above that to make a profit. However, if the seller prices the item too high, the customers may opt for a different model that provides similar utility. Thus, the seller has to find a balance between the production cost and the perceived economic value in the market.

Why Economic Value Matters

Economic value plays a critical role in determining the success of a business in a competitive market. The price of a good or service has to reflect its perceived value to the customers if the seller wants to make a profit. A seller who understands the perceived value of their product is better equipped to price it appropriately and maintain competitiveness in the market.

Evaluating the economic value of a product also helps companies in making strategic decisions about investing in research and development, marketing, and improving the quality of their products.