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What Is Economic Value?
Economic value is how much a person values an economic good based on the benefit they get from it. It is often estimated by how much someone is willing to pay, usually in money terms. Economic value is different from market value, which is the actual sales price of a good or service. Market value can be higher or lower than what any one person values the good at.
Key Takeaways
- Economic value is determined by personal preferences and the trade-offs people make with their resources.
- Willingness to pay is a common method to estimate the economic value people assign to goods.
- Hedonic pricing uses statistical models to estimate economic value based on a good’s attributes.
- Economic value is subjective and varies with individual intentions, making it challenging to measure directly.
- Companies use economic value to the customer (EVC) to price products, considering both tangible and intangible factors.
How Personal Preferences Shape Economic Value
A person’s preferences set the economic value of a good or service. For example, if someone has an apple, the economic value is the benefit they get from it. If they plan to eat it, they value the enjoyment and nutrition they expect from the apple.
The apple’s economic value isn’t a fixed trait of the apple itself. It depends on how the person values and plans to use it. While the apple’s features might affect its use, the main source of its economic value is the person’s expectation of how well it meets their needs.
Estimating Economic Value for Consumer Goods
Economic value is subjective, depending on a person’s intentions, and can’t be directly measured. However, different methods have been created to try and estimate it.
Gauging Economic Value Through Willingness to Pay
The classic method that economists use to estimate how much people value an economic good is to look at the price they pay for it. When an individual buys a good, they give up a given amount of money in return. Because they value both the good they receive and the money they give up based on their subjective, intended use (for the good or the money) it is obvious from their choice to purchase the good, that they must place a higher economic value on the good than on that amount of money. Thus, the price that a person pays for a good provides one way to quantify the economic value of that good.
Using Hedonic Pricing to Determine Economic Value
Hedonic pricing is another method to estimate the economic value of a good. It uses statistical analysis to assess how people value specific attributes of a good based on past sales. Attributes determine how well the good meets a person’s needs and influence its value. Economists create models showing how similar goods’ attributes have affected past prices to estimate a good’s value.
Leveraging Economic Value in Marketing Strategies
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 considers the tangible and intangible value of a product. The tangible value is based on the product’s functionality, and the intangible value is based on consumer sentiment toward product ownership.
For example, a consumer places a tangible value on a durable pair of sneakers that provide protection and support during athletic activity. However, the sneaker’s brand label or affiliation with a celebrity can add intangible value to the sneakers. Marketer can use surveys, focus groups, or other tools, so get an idea of how much value consumers will place on the sneakers based on their characteristics.
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