Economic Value

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DEFINITION of 'Economic Value'

The worth of a good or service as determined by people’s preferences and the tradeoffs they choose to make given their scarce resources, or the value the market places on an item. Economic value is represented by 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'

How people choose to spend their income and their time determines a good or service’s economic value. Economic value is not static, but changes when the price or quality of similar items changes. For example, if the price of milk increases, people may not only buy less milk, but also less cereal.

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 petroleum engineering will likely enjoy dramatically more economic value from their degrees than students who major in counseling psychology, according to a 2013 Georgetown study. The market places greater worth on certain skills than others, and the degrees that lead to these skills have greater economic value.

Today, most economists believe economic value is subjective—that it depends on individual preferences. But notable past economists, such as Karl Marx, believed economic value was objective—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.

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