Economic Value

What is 'Economic Value'

Economic value is the maximum amount a consumer is willing to pay for an item in a free market economy or the amount of time an individual will sacrifice waiting to obtain a government-rationed good in a socialist economy. In contrast, market value represents the minimum amount a consumer will pay. Economic value thus often exceeds market value.

BREAKING DOWN 'Economic Value'

The economic value of a good or service is determined by preferences of a given population and the tradeoffs its members make given their resources. Economic value is also directly correlated to the value that any given market places on an item.

Economic Value of Consumer Goods

Economic value is not a static figure; it changes when the price or quality of similar items changes. For example, if the price of milk increases, people may buy less milk and less cereal. This might lead manufacturers and retailers to lower the cost of cereal to entice consumers to buy more. How people choose to spend their income and their time, therefore, determines a good or service's economic value.

Economic Value in Marketing

Companies use the economic value to the customer (EVC) to set prices for their products or services. EVC is not derived from a precise mathematical formula, but it takes into consideration the tangible and intangible value of a product. The tangible value is based on the product's functionality, and intangible value is based on the consumer's feelings about owning the product. For example, a consumer places tangible value on a durable pair of sneakers that protects and supports his feet during athletic activity. However, the sneaker's brand label or affiliation with a celebrity can add intangible value to the sneakers.

Economic Value of College Degrees

Another use for economic value is weighing the merits of college degrees in different disciplines. While there is a general consensus that a college degree has more economic value than a high school diploma, some college degrees have a higher economic value than others. For example, students who major in STEM (science, technology, engineering, and mathematics) fields such as petroleum engineering will likely enjoy dramatically more economic value from their degrees than students who major in fields such as early childhood education, human services or art, according to a 2015 Georgetown study. The market places greater worth on certain skills than others, and the degrees that lead to these skills have greater economic value.

Although modern economists believe economic value is subjective, notable past economists, such as Karl Marx, believed economic value was objective. Marx believed that the value of a good was determined by the value of labor used to make it, not by what people were willing to pay for the finished product.