Economic Value vs. Market Value: An Overview

Both market value and economic value are widely used in business for various purposes. Each valuation employs different criteria is their calculations. Market value is the price of something, such as an asset that's determined by the supply and demand of the asset in the marketplace. The economic value represents the maximum amount a customer is willing to pay for something.

Market Value

Market value is based on supply and demand and is the price or amount that someone is willing to pay in the market. A company's stock price might trade higher or lower on an exchange based on the perceived market value by investors. If a company performs poorly, the market value will likely decline, for example.

The market value of a company's stock price is used in determining its market capitalization. The market cap is calculated by multiplying the number of shares outstanding by the company's stock price per share.

Market values are easy to determine for assets that are readily available and frequently bought and sold, such as stocks. However, some assets are not as easily calculated. For example, real estate assets might need an assessment from a real estate appraiser to provide a proper valuation. Also, companies that are not listed on public exchanges are more difficult to determine their market values versus companies that are publicly traded. Publicly traded companies must release their financial statements to investors while private companies do not need to furnish their financials. As a result, determining the market value of a private company can involve a lengthy investigative process.

The market value of an asset or a security can be impacted by several factors including economic conditions, the level of supply and demand, and the quality of the underlying asset or a company that has issued a stock.

Economic Value

Economic value is the measurement of the benefit derived from a good or service to an individual or a company. Economic value can also be the maximum price or amount of money that someone is willing to pay for a good or service. As a result, economic value can be higher than market value. 

The economic value is the amount an individual is willing to pay for a good or service while considering the money could be spent elsewhere. However, the economic value can change if the price of the good or service changes. If the price of a product rises significantly, individuals might no longer buy the product leading to a decline in its economic value. As a result, the producer of the product might lower prices since the lower economic value has to lead to a decline in sales of the product. 

A company might determine the economic value  of its products to help set prices and forecast demand for it. However, economic value does not have a precise formula since it considers the consumer's views of the product as well as its overall functionality. For example, the price for an iPhone from Apple might have a higher economic value due to that so many consumers view Apple's brand name as synonymous with high-quality products. 

For a company, economic value might represent the value that the company derives from using an asset. The value may be higher or lower than the market value for a similar asset. However, economic value typically exceeds market value.

Key Takeaways

  • Market value is based on supply and demand and is the price or amount that someone is willing to pay in the market.
  • Economic value is the measurement of the benefit derived from a good or service to an individual or a company. 
  • Since economic value can be the maximum price that someone is willing to pay for a good or service, it can often be higher than market value.