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Author Topic:   Economics: How much is something worth?
Percy
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Posts: 22929
From: New Hampshire
Joined: 12-23-2000
Member Rating: 7.2


Message 1 of 330 (660961)
05-01-2012 7:12 AM


In economics the question "How much is something worth?" has a simple answer: what someone is willing to pay.
It is not worth what people think it should be worth or wish it should be worth or hope it will be worth someday. It is worth what someone is willing to pay.
I was about to submit this topic when I thought I should find at least one other source that agrees with me. The first search item returned by Google turned out to suffice: Basic Concepts of Economic Value. Here's the first few paragraphs:
Economic value is one of many possible ways to define and measure value. Although other types of value are often important, economic values are useful to consider when making economic choices — choices that involve tradeoffs in allocating resources.
Measures of economic value are based on what people want — their preferences. Economists generally assume that individuals, not the government, are the best judges of what they want. Thus, the theory of economic valuation is based on individual preferences and choices. People express their preferences through the choices and tradeoffs that they make, given certain constraints, such as those on income or available time.
The economic value of a particular item, or good, for example a loaf of bread, is measured by the maximum amount of other things that a person is willing to give up to have that loaf of bread. If we simplify our example economy so that the person only has two goods to choose from, bread and pasta, the value of a loaf of bread would be measured by the most pasta that the person is willing to give up to have one more loaf of bread.
Thus, economic value is measured by the most someone is willing to give up in other goods and services in order to obtain a good, service, or state of the world. In a market economy, dollars (or some other currency) are a universally accepted measure of economic value, because the number of dollars that a person is willing to pay for something tells how much of all other goods and services they are willing to give up to get that item. This is often referred to as willingness to pay.
--Percy

Replies to this message:
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 Message 4 by Buzsaw, posted 05-01-2012 8:33 AM Percy has replied
 Message 8 by nwr, posted 05-01-2012 9:11 AM Percy has replied
 Message 11 by Jon, posted 05-01-2012 10:14 AM Percy has replied
 Message 21 by Modulous, posted 05-01-2012 12:39 PM Percy has seen this message but not replied
 Message 30 by Dr Jack, posted 05-01-2012 2:29 PM Percy has replied
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Phat
Member
Posts: 18631
From: Denver,Colorado USA
Joined: 12-30-2003
Member Rating: 4.4


Message 2 of 330 (660968)
05-01-2012 8:12 AM
Reply to: Message 1 by Percy
05-01-2012 7:12 AM


How Much Value?
Hi Percy. Is this topic also about how much someone is worth?
In other words...I work at a grocery store, right? Is economics also about how much we should pay the checker? And how is such a wage determined, apart from the labor union?

This message is a reply to:
 Message 1 by Percy, posted 05-01-2012 7:12 AM Percy has replied

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Straggler
Member (Idle past 314 days)
Posts: 10333
From: London England
Joined: 09-30-2006


(1)
Message 3 of 330 (660972)
05-01-2012 8:26 AM
Reply to: Message 1 by Percy
05-01-2012 7:12 AM


Without hindsight you don't know how much something is worth.
The unsung work of some poorly paid publicly funded research scientist might one day prove absolutely vital to a technology that transforms the world and increases the productivity and living standards across the globe for future generations.
Or some of the highest paid people in the world may not be nearly so clever as they have persuaded everybody (including themselves) that they are. Instead of being the "wealth creators" they believe themselves to be it may turn out that their financial exploits in fact do considerable damage to people's living standards and end up destroying more wealth than they could ever hope to create.
Oh wait a minute....hasn't that happened recently?
People get paid what they can persuade someone to pay them. How much they are actually worth only time will ultimately tell.

This message is a reply to:
 Message 1 by Percy, posted 05-01-2012 7:12 AM Percy has replied

Replies to this message:
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Buzsaw
Inactive Member


Message 4 of 330 (660974)
05-01-2012 8:33 AM
Reply to: Message 1 by Percy
05-01-2012 7:12 AM


Re; Economic Values
Percy writes:
Thus, economic value is measured by the most someone is willing to give up in other goods and services in order to obtain a good, service, or state of the world. In a market economy, dollars (or some other currency) are a universally accepted measure of economic value, because the number of dollars that a person is willing to pay for something tells how much of all other goods and services they are willing to give up to get that item. This is often referred to as willingness to pay.
The dollar's value, relative to the goods and services, is determined by whether a dollar represents intrinsic value or simply a Federal reserve paper note issued/printed by private Federal Reserve central banks.There was a time when this note was a promisary note, assuring the bearer of it that it could be exchanged for a specified amount of silver, as stated on the note.
It was an obligatory note issued/printed by the private banks, holding the gold or silver in reserve, promising the bearer the ability to exchange at any bank for silver, as with the old silver certificate notes. The last year this was possible in the US was in 1969, when the half dollar coin contained 40% silver. the last year in which one could exchange the printed note for something of intrinsic value. Subsequent to that date, it's value was determined by bearers of money notes relative to their perception of the value of the notes.

BUZSAW B 4 U 2 C Y BUZ SAW.
The Immeasurable Present Eternally Extends the Infinite Past And Infinitely Consumes The Eternal Future.
Someone wisely said something ;ike, "Before fooling with a fool, make sure the fool is a fool."

This message is a reply to:
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Percy
Member
Posts: 22929
From: New Hampshire
Joined: 12-23-2000
Member Rating: 7.2


Message 5 of 330 (660975)
05-01-2012 8:47 AM
Reply to: Message 2 by Phat
05-01-2012 8:12 AM


Re: How Much Value?
Hi Phat,
Sure it's about the checker's pay, whether it's determined by a union or not. The value someone is willing to exchange for anything, whether it's a person's labor or a material object, is the definition of its value.
--Percy

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Percy
Member
Posts: 22929
From: New Hampshire
Joined: 12-23-2000
Member Rating: 7.2


Message 6 of 330 (660977)
05-01-2012 8:59 AM
Reply to: Message 3 by Straggler
05-01-2012 8:26 AM


Straggler writes:
Without hindsight you don't know how much something is worth.
Yes, this is true. Until money actually changes hands, you don't know.
The other things you talk about are subjective or qualitative or speculative and have no direct bearing on the definition of value in economics. Your definition of value or worth cannot be used to calculate anything and cannot serve as an objective underpinning.
People get paid what they can persuade someone to pay them. How much they are actually worth only time will ultimately tell.
What people can persuade someone to pay them is their economic value. What they may someday be worth in economic terms is speculative. And what they're actually "worth" in other terms is not part of economics.
--Percy

This message is a reply to:
 Message 3 by Straggler, posted 05-01-2012 8:26 AM Straggler has replied

Replies to this message:
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Percy
Member
Posts: 22929
From: New Hampshire
Joined: 12-23-2000
Member Rating: 7.2


Message 7 of 330 (660979)
05-01-2012 9:03 AM
Reply to: Message 4 by Buzsaw
05-01-2012 8:33 AM


Re: Re; Economic Values
Hi Buz,
You should probably find another thread if you'd like to discuss whether currency should be backed by gold or silver.
If you'd like to discuss value or worth as defined in economics and it bothers you to think of value in terms of currency then think of it in terms of how many hours of your own labor you think something is worth.
--Percy

This message is a reply to:
 Message 4 by Buzsaw, posted 05-01-2012 8:33 AM Buzsaw has replied

Replies to this message:
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nwr
Member
Posts: 6484
From: Geneva, Illinois
Joined: 08-08-2005
Member Rating: 9.1


Message 8 of 330 (660981)
05-01-2012 9:11 AM
Reply to: Message 1 by Percy
05-01-2012 7:12 AM


Percy writes:
In economics the question "How much is something worth?" has a simple answer: what someone is willing to pay.
There is no answer to "How much is something worth". There could not be an answer.
Sure, we might be able to answer "How much is X worth" with "$5". But that begs the question of how much is a dollar worth. And there is no answer to that, because there is no measuring scale by which to judge worth.
It is a relativity problem. We can ask "How fast is the earth moving?" but there is no possible answer. If Einstein taught us anything, it is that there is only relative motion. There is no such thing as absolute motion.
It looks as if the same is true of worth. There is only relative worth, not absolute worth. So if I say "X is worth $5", I am only stating a relative worth, comparing the worth of X with the worth of a dollar.
The relative worth of X compared to Y changes over time.

Jesus was a liberal hippie

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Percy
Member
Posts: 22929
From: New Hampshire
Joined: 12-23-2000
Member Rating: 7.2


Message 9 of 330 (660982)
05-01-2012 9:21 AM
Reply to: Message 8 by nwr
05-01-2012 9:11 AM


nwr writes:
There is no answer to "How much is something worth". There could not be an answer.
In economics there is an answer: what someone is willing to pay.
The relative worth of X compared to Y changes over time.
Yes, of course.
It can even be different at the same time. You buy broccoli for $2/pound at Al's market while your friend buys broccoli across town for $1.80/pound at Jim's market.
Even what one is willing to pay depends upon many factors. This past weekend we happened to be in Massachusetts (which has a sales tax), but we decided to buy some items there and pay the sales tax because the cost in gas to go out of our way on the way home in order to purchase the items in New Hampshire (which has no sales tax) would be more. Plus it would have taken more time.
--Percy

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vimesey
Member (Idle past 321 days)
Posts: 1398
From: Birmingham, England
Joined: 09-21-2011


(1)
Message 10 of 330 (660986)
05-01-2012 9:53 AM
Reply to: Message 9 by Percy
05-01-2012 9:21 AM


Bernie Ecclestone once said:
"You can have anything you like, as long as you pay too much for it."
This raises an interesting point - if someone with way too much money and no appreciation of, say, art buys what turns out to be a canvas upon which a monkey has thrown paint, for $1,000,000, is that painting worth $1,000,000 ? Is there any level at all of objective worth which overrides a nutter forking out a fortune for a turd ? If he tries to sell it the next day, will someone pay what it was worth just 24 hours earlier ?
Is the analysis different if the person knew how the canvas was created, but pays the money anyway for the sheer hell of it, because they have many more $1,000,000's where that came from.
Does the analysis of something being worth what someone is willing to pay for it, break down in any way at the extremes ? And if it does, where is the boundary ?

This message is a reply to:
 Message 9 by Percy, posted 05-01-2012 9:21 AM Percy has replied

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Jon
Inactive Member


Message 11 of 330 (660988)
05-01-2012 10:14 AM
Reply to: Message 1 by Percy
05-01-2012 7:12 AM


Real Worth
It is worth what someone is willing to pay.
I find this flawed. And here is why:
What a good or service is worth is a measure of the benefit that someone receives from consuming that good or service. For obvious reasons, this cannot be the same as what someone is willing to pay for that good or service since people will only exchange their ability to consume something else (which is all paying for something is) if the thing they are consuming is worth more to them than the other things they gave up consuming (that is the other things they could have bought with the money they paid, = the price of the good or service).
Thus, economic value is measured by the most someone is willing to give up in other goods and services in order to obtain a good, service, or state of the world.
If the purchased item does not provide a higher return (even if it is just perceived) than what it cost, it will not be purchased. People have to think the item on the shelf is worth more than the money in their pockets before they will exchange the latter for the former.
Jon

Love your enemies!

This message is a reply to:
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Percy
Member
Posts: 22929
From: New Hampshire
Joined: 12-23-2000
Member Rating: 7.2


Message 12 of 330 (660989)
05-01-2012 10:17 AM
Reply to: Message 10 by vimesey
05-01-2012 9:53 AM


Hi Vimesey,
No, the definition doesn't break down at the boundaries. We can follow your painting from the process of creation to sale to resale.
An eclectic artist buys a canvas for $10, a frame for $10, paint for $10, rents a monkey for $10, uses $10 in gas, and pays $10 for monkey treats. The monkey uses the paint to create a painting on the canvas. Total outlay: $60.
The artist hangs the painting in his gallery with a price of $100. The actual value of the painting is unknown at this point.
A millionaire driving by the artist's gallery is having an argument with his wife, who is belaboring him about his foolishness with money. He declares that it's his money and he will do what he wants with it. He see's the gallery and declares to his wife that he's going to walk into the gallery and pay a million dollars for the worst painting he can find.
The millionaire enters the gallery and pays the delighted artist one million dollars for the monkey's painting. The painting is now worth one million dollars. The artist has created wealth or value in the amount of $1,000,000 (price he received for the painting) minus $60 (cost to produce the painting) which is $999,940.
The next day the millionaire's wife decides she's going to teach her husband a lesson. She takes the painting and returns to the artists gallary and asks him how much he'll pay to buy it back. The artist tells her $60, and she agrees. The wife has now removed value equal to $999,940, which happens to be the exact amount by which the rich couple have reduced their net worth.
The next day the millionaire decides he's going to teach his wife a lesson and goes back to the artist and buys it again for a million dollars. Things continue like this for several weeks and the artist becomes very rich. He buys the monkey and retires to his own Pacific island.
--Percy

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RAZD
Member (Idle past 1653 days)
Posts: 20714
From: the other end of the sidewalk
Joined: 03-14-2004


Message 13 of 330 (660990)
05-01-2012 10:24 AM
Reply to: Message 4 by Buzsaw
05-01-2012 8:33 AM


Re: Re; Economic Values
Hi Buzsaw,
The dollar's value, relative to the goods and services, is determined by ...
The economic value of the dollar, in this case how much dollars are you willing to give up to buy groceries is what gives both the dollar and the groceries value in the market.
It does not matter what the medium of exchange is.
... could be exchanged for a specified amount of silver, as stated on the note.
And you can still exchange silver for groceries, and you can still exchange dollars for silver. The fact that the value of silver goes up and down based on market value does not mean that the dollar should be forced to go up and down as well -- it has it's own value.
That I should be willing to trade an apple for a pear today does not mean that I have to trade an apple for a pear tomorrow. And each change value on a daily basis compared to peaches and blueberries.
The purpose of money is to have an easy to carry medium of exchange that everyone agrees on for the value compared to what they want to buy or sell at the time of the transaction.
Stocks have no real value until sold or bought, which is why you only count capital gain or loss when they are sold.
There is no need to set an arbitrary value on something as everything in the market has relative value based on day to day trading -- that is what economic values are all about.
What is a car worth in peaches? However many peaches you can get for it.
Could I get the same number of peaches in a week?
If the dollar was based on peaches, what does that do to the value of my car? Does it make sense to tie the dollar value to something that fluctuates in value like peaches?
Would it make sense that I sell my car for a thousand peaches and then wait six months to exchange my peaches for another car?
Enjoy.
Edited by RAZD, : clrty

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This message is a reply to:
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vimesey
Member (Idle past 321 days)
Posts: 1398
From: Birmingham, England
Joined: 09-21-2011


Message 14 of 330 (660991)
05-01-2012 10:35 AM
Reply to: Message 12 by Percy
05-01-2012 10:17 AM


lol ! Ticket to that island please !
So does this mean that attributing "worth" to an item is no more than keeping track of the movement of money in a closed system, so as to preserve total net worth ?

This message is a reply to:
 Message 12 by Percy, posted 05-01-2012 10:17 AM Percy has replied

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Percy
Member
Posts: 22929
From: New Hampshire
Joined: 12-23-2000
Member Rating: 7.2


Message 15 of 330 (660992)
05-01-2012 10:36 AM
Reply to: Message 11 by Jon
05-01-2012 10:14 AM


Re: Real Worth
Hi Jon,
All you're doing is enumerating some examples of the rationale people might go through in making a purchasing decision. But in economics when something changes hands the value is the amount paid.
Even been to a flea market? You have to get there early because the good stuff goes *very* fast. And it goes very fast because the knowledgeable prey upon the unknowledgeable and buy up all the stuff that is marked too low. In short order the $5 plate from grandma's table is on the shark's table for $100, and later it is purchased for $80.
It's easy to track this example. Assuming grandma's original acquisition of the plate is lost to history, grandma created value of $5, and the shark created value of $75. That's the way it works.
Think of economics like bookkeeping. You can't have columns that don't balance. You can't have money changing hands while at the same time entering numbers in your spreadsheet that are adjusted by your estimate in dollar terms of additional benefit. Our shark is pretty sure he can sell the plate for more than $5, but until he actually does the plate is still worth just $5, the price he paid for it.
--Percy

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