Value, utility, price: what differences?

What it is worth

Value is a vague and multifaced word.

In economics and finance it can relate to various individual or social
notions: price, estimate, cost, utility...

sous Is it really worth what it costs?

From philosophy and mathematics
to economics

Beware, to talk about value puts you on a slippery ground,
the word can mean many things.

This ambiguity is a boon for poets, humorists and ideologues...
But also a problem for dispassionate analysis and decision making.


For example a value is:
  • A brain philosophical / ethical word,
In this sense, value qualifies a behavior principle (courage,
fairness, love, frugality, cleanliness, literacy, frankness or
whatever...)
that is considered, rightly or wrongly, good for
people and society
.

What is seen as a value in a civilization might be seen as
negative in another one.
  • Also a calcul mathematical element,
It refers to a number taken by a parameter.
  • And also an car economic notion (derived from those above),
Its form is also a (monetary) number, which is related here
to the satisfactions (and dissatisfactions) attributed to a
product, a service, some work, an asset, a project...

That numerical attribute can be one of several different
parameters as seen below.

The economic notions / parameters of value

  • The  market market value is the current buysell price
of a good, a service, an asset, a work hour.

To take it as a reference supposes of course that there is a
real, competitive, transparent and not too erratic market
that gives a reliable priceprice information.
  • The official price,
It is set by a public authority or by a monopolistic organization
that replaces a true market.


As it might not really reflect the people expectations or needs,
or the product availability, a parallel price, sometimes much
lower or higher, might then exist in an unofficial "grey" or "black"
market.
  • The fundamental / intrinsic / economic value
is an estimated theoretical value, in other words it is an expert's
"valuation".


Actually there is no fundamental value per se.
There are always some uncertainty about the elements on
which to base that estimate.
It depends of:
    • Who estimates it,
      • With already known as well as prospective data.
  • The market-based value / valuation or potential market value
It is an adjusted fundamental value to take into account market
practices and situations.

It is also called the "extrinsic" value. This word is used to show
the difference with the intrinsic value seen above.
  • The fair value is, depending on the interpretations,
  • either (for valuation experts) the intrinsic value seen above,
  • or (for moralists) what is considered ethical, socially acceptable
  • or (for economists) what gives the best allocation
 of economic resources
  • or (for accountants)
an accounting concept that uses the market value
or a market-based valuation.
  • The equipment cost-based / resource-based value,
It can be, in a quite reductive example, the "labor-value"
(the workers' time
input) of a product or service,

That narrow approach was widely used by classical economists
from Pareto to
Marx who saw it as the basis of economic value.
See also factors of production and of economic value.
  • Utility is the person personal value attributed by an individual.
That person will compare it to the price so as to decide to
buy, sell or ...abstain to act.
It takes into account the person's own situation and
preferences.
This the value based on the gain prospect and the risk
attitude of the decider (which is the case in investment
decisions).
  • In parallel, people call sometimes "value" the added utility,
It is the difference - when it is positive - between
    • the price that has to be paid
    • the buyer's perception of what it gets for that price
(in other words what it sees as the "utility" or "expected
utility" mentioned above).

More details in the Asset valuation article

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M.a.j. / updated : 01 Sept. 2015
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