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analysis:economics:price_vs_worth_vs_value

Cost vs Price vs Worth vs Value

In everyday language, cost, price, worth and value are often interchangeable, but their usage differs somewhat, and they also have specialized meanings in Economics, business and Philosophy.

Everyday language

value
The usefulness or desirability of good or service, how much you love it, or what it is “worth to me.” Value is not a number, but often we can compare the values of two things, especially if they are similar in use. Intuitively we see value as being intrinsic and stable over time, but analysis shows it must be somewhat dependent on individual preferences and social context. This stability of value stands in contrast to the fluctuations of market prices, and even when the price is stable, it may seem out of line with our perception of the value.
cost, price
The amount of money required to purchase something (a good or a service.) Cost is from the purchaser's viewpoint, so has a negative connotation (cost is bad). The difference is clearer when these words are used as verbs:
Customer: “How much does that cost?”
Clerk: “I don't know, I'll get my boss to price it.”
worth
An expected selling price of some form of property, an appraisal. When we talk about worth, we are taking the viewpoint of the owner, and speculating about a possible sale, or what it might cost to replace our property. Worth is a long-term perspective. As with value, we think of worth as being stable across market price fluctuations, and so as somewhat intrinsic in the thing. We tend to imagine an ideal buyer, one who values the property as least as much as we do. If sale prices refuse to align with our expectation, we may have to adjust our idea of worth, but we can do this without having to change our judgment of value, what it is “worth to me”.

Price and worth are similar, but a true price only exists when we are actually selling, whereas we can speculate about worth at any time. Also, if we actually do sell, and prices are negotiable, we will set our price higher than what we think it is worth.

Of course these generalizations about usage have many exceptions. Expressions of worth that are vague (worth a great deal) or dramatic (worth the world) refer to non-monetary value. We aren't anticipating the selling price of our civil rights or our children. A clever economist could probably calculate a cash value of civil rights, perhaps by comparing the social health of a place where they are common with one that lacks them to some degree, but by law and tradition it’s profoundly wrong to assign a price to them. Similarly, when we say we are counting the cost, or ask At what price?, we are not actually expecting a discussion of money.

In Economics

Economics offers theories (see Story) that explain the observed behavior of buyers and sellers in markets, exchanging money for goods and services. In this real world we see that price, value, etc. are similar, so it is unsurprising that economic theory offers explanations of why they should tend to be the same. Economists have also examined various sorts of mismatch and offered theories to explain them, but equilibrium theories predict that, in the long run, value, price and worth will converge.

Equilibrium theories are still popular with economists who are ideologically opposed to government intervention (see Austrian school and Chicago school), but the major dividing line between Classical economics and modern thought is appreciation of how poorly the premises of equilibrium and rational individual choice describe actual economic behavior. The economy is a Dynamical system that not only never reaches equilibrium, but is also chaotic. Our judgements of value and worth are consistently biased in ways that do not correspond to economic rationality.

This is the essence of Keynes’s Animal Spirits, the mood of the market. The market price is subjective value rendered specific by the market. The market does indeed average individual value judgments, but our behavior deviates from the economic ideal in consistent ways, and is strongly influenced by our social network, so what market converges toward is The Collective Subjective.

Modern economics also recognizes that there are cases (such as environmental pollution) where an unregulated market does not lead to a desirable outcome. This Market failure can be understood as a long-term mismatch between price and value.

Prices vary, even when the theoretical value of the products and number & wants of the potential buyers assigning worth to the goods do not– Similarly, if the demand for something goes up–if it’s worth to the people making up the collective subjective rises–the price should also go up, but not immediately. The disconnect may be small, but it exists. The fact of the lag-time's existence can be described as supply and demand in action. True enough. But that does not change the fact that supply and demand are not static, and therefore can be more broadly described as a demonstration of a process in action, proof of one situation becoming another situation, rather than instantly jolting into a new stasis.

value
How much usefulness or pleasure an individual gets from a commodity or service. In economics, Value is still stable and subjective (see utility), but it is also supposed that value has all the properties of a number–that you can not only compare, but also add, divide and do calculus on values. Economists suppose that there is no problem with unlike categories of value, so you can express the value to a person of having one year of free speech as being equal to some specific number of boxes of shredded wheat. Though it is theoretically a number, economic value can't be given in dollars or any other currency because value would then vary over time (due to inflation) and by country (according to exchange rate). nominal value is another name for cost.
price, cost
Unless the mechanics of the Market are being studied, economists take the after-the-fact view, assuming that cost and the (final) price are identical numbers, and they also average price across the market, so that it doesn't depend on the psychology of any particular buyer and seller. Real cost is adjusted for inflation, such as constant 1970 dollars. This better represents the underlying value because it doesn't change over time.
worth
In economics, worth is related to the theory of capital. It doesn't make sense to talk about the worth of a service or other forms of labor, because we can't accumulate a labor, expecting to sell it later. Economics predicts that we will sell something only when its worth in the market exceeds its value to us.

In Business

Economic theories often describe the behavior of entire markets or economies fairly accurately, but success in business is almost entirely dependent on details that are hidden when economists average across all sellers (competitors) and buyers (customers). Business thrive by exploiting imperfections in the market (see Arbitrage) and exploiting behaviors of customers and competitors that economists consider irrational (That is, not conforming to their theory. See Biases, Story and Homo Economicus.)

value, worth (accounting)
In accounting and finance, value is the same as what we have called worth (an expected sale price). Value is still somewhat subjective because of the difficulty of determining the value of something without actually selling it (see Prediction is Intractable). Accounting estimates the Book value by depreciation and other corrections, but the true value may be more, or (often) much less.
value (marketing)
In marketing, and many other aspects of business, value is understood to be highly subjective. Marketing in particular attempts to increase the perceived value of a product (so that it can be sold at a higher price) without making any costly changes, ideally without any change at all. This is done through branding and Product differentiation.
price, cost
The price of a widget is what you can sell it for, while the cost is how much you have to spend to make one. Profit is the difference between the two, determining the success or failure of a business.

See also Value.

Discussion

Nweke Amobichukwu Henry, 2014/04/28 02:51

nice job

:

manav gupta, 2014/09/23 19:04

holy mooly I was thinking of tackling the understanding of economics and how the markets work all by myself but after reading this article I will have to rethink my strategy. I wish I could just sit by the feet of this author and listen listen listen until it all makes sense inside my head. Anyway, I am sure his time is worth more than the price I can afford to pay!

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analysis/economics/price_vs_worth_vs_value.txt · Last modified: 2014/02/14 11:51 by ram