Value

Subject: Value Student: Marian Blackford Due 9/19/07

VALUE

The adage, “There **Ain’t No Such Thing As A Free Lunch**,” popularized by science fiction writer Robert A. Heinlein in his 1966 novel //The Moon Is a Harsh Mistress,// means that a person or a society cannot get something for nothing.[|[1]] This adage is attributed to the once-common tradition of saloons in the United States providing a “free” lunch to patrons, who were required to buy at least one drink. Since the exchange took place, we know both the patrons and saloon owners perceived value in the exchange.

Everything has a value and that value is measured by what a person or society is willing to sacrifice to obtain it. As demonstrated by the Demand Curve, the more we value something the more we are willing to pay.

But what is value, and how is it measured? “Value is defined as something “held in high esteem or appreciation”, “having worth”, something that is “valid, sound”. It is a “measurement of relative worth”, “the estimate in which something is held related to principles or standards of what is valuable in life”, and “the quality of a thing considered in respect of its power and validity for a specified purpose or effect”.[|[2]]

For centuries, economists have struggled to accurately and fully define and measure value. The **paradox of value** (also known as the **diamond-water paradox) ([|**[3|3]]** explores the fact that though water is more useful in terms of survival, diamonds are generally more expensive to acquire. This paradox suggests the impact that scarcity (in the case of diamonds) can have on the value of a good. For example, if water were scarce, say the last ounce of water on a survival raft adrift in the Pacific Ocean, its value would vastly exceed that of diamonds for most people.

Value is personal and dependent on many factors. It includes both direct and indirect sacrifices. Direct sacrifices are usually easily converted to monetary terms and include such things as the exchange of money, goods, and services. Indirect sacrifices include the value a person places on their time, energy, health, life and intergrity to name a few, and are sometimes difficult to measure. Even more difficult to measure are less obvious indirect costs such as the cost of clean water and clean air, especially if those costs are not well understood or quantified. Though sometimes difficult, it is necessary to include all of these sacrifices to arrive at the maximum actual value one is willing to give up to obtain a good, service or intangible.

For example, assume gasoline is $3.00 per gallon at the Shell station 1 block away. It is $2.50 per gallon at the Zip station 12 miles away. Susan estimates she will burn 1 extra gallon of gas if she drives to the Zip station and it will take 1/2 hour of extra time round trip. At either station she will buy 20 gallons of gas. She values her time at $20 per hour. To determine the better value, Susan must add the cost of her time to the cost of the gas purchased and the gas burned if she drives to the Zip station; that is, 20 gallons times $2.50 ($50) plus $10 for her time(1/2 hour times $20/hour) plus $2.50 for one gallon burned, for a total of $72.50. The cost of gas at the Shell station is simply 20 gallons times $3.00 for a total of $60. Therefore, the better value for Susan is to purchase the gas at the Shell station.

Value is not the same as market price. Take the case of the “free” lunch introduced above. There were undoubtedly potential patrons who were not willing to sacrifice the price of the drink for the lunch and drink combination, just as there were likely patrons who would have been willing to pay more than the market price charged by saloon owners. Each person will purchase only the things whose market price is less than or equal to the value they are willing to pay.

For those who do purchase, economic benefit is the difference between market price and the value one is willing to pay.[|[4]] For example, assume I purchase 2 Superbowl tickets for $2,400 each. One is on the 50 yard line in row 100 and the other is on the 10 yard line in row 16. Further assume that I would be willing to pay $3,000 for the ticket on the 50 yard line and $2,500 for the ticket on the 10 yard line. The Economic benefit of the ticket on the 50 yard line was $600 and only $100 for the other. The economic benefit is different for the two tickes because of the value of the tickets is different to me, even though the market price is the same. Value is personal. Market price is not.

Multiple Choice Questions:

1 How is economic benefit related to value? a. They both measure the maximum amount an individual is willing to pay for the good or service b. Value is the market price for the good or service and economic benefit is the price the individual is willing to pay for it c. Economic benefit is the amount by which value exceeds market price d. Economic benefit is the value to society for the good or service

The answer is c since the consumer incurs economic benefit when market price is lower than value, the maximum amount the consumer is willing to pay for the good

2 Which factors are most appropriate to include in the measurement of value? a. Time, health, and money b. Cost of substitute goods c. Cost of complimentary goods required for the item to be useful d. Time, health, money and cost of substitute goods

The answer is a since they represent direct and indirect costs

3 If two pair of shoes sell for the same price but in different cities, then: a. By definition they have the same value b. Their selling price is their economic benefit c. They could have different economic values d. Their market value is the same as their economic value

The answer is c because market price does not provide enough information to determine their value

4 Jenni, who values her time at $20 per hour, wishes to buy a pair of shoes. Shoe Carnival is having a tent sale and she estimates it will take her two extra hours to go there and find and purchase the shoes she wants for $60. She is at the Mall where she can buy the same shoes for $85 in just 15 minutes. Which statement is true? a. Jenni should buy the shoes at Shoe Carnival since they cost less. b. The shoes at the Mall are a total cost of $85 to Jenni c. Jenni should add the value of 1 hour and 45 minutes to of her time to compute the total cost of the Shoe Carnival shoes d. Jenni should buy the shoes at the Mall.

The Answer is d. The Mall shoes cost $85 + $5 (.25 hours x $20) for her time for a total of $90. At Shoe Carnival the total cost is $60 + $50 (2 hours x $20) for her time for a total cost of $100.

5 Indirect costs a. Should not be included in the measurement of value b. Should be doubled when included since they are estimates c. Should be estimated and included in value d. Include the cost of complementary goods but not competitive goods

The answer is c because value is the total of direct and indirect costs

References:

Basic Concepts of Economic Value http://www.ecosystemvaluation.org/1.01.htm

TANSTAAFL http://en.wikipedia.org/wiki/TANSTAAFL

Paradox of Value http://en.wikipedia.org/wiki/Paradox_of_value

What is Economic Value Management? http://www.thevaluealliance.com/economic_value_management_defined.htm

[|[1]] TANSTAAFL http://en.wikipedia.org/wiki/TANSTAAFL

[|[2]] What is Economic Value Management? http://www.thevaluealliance.com/economic_value_management_defined.htm

[|[3]] Paradox of Value http://en.wikipedia.org/wiki/Paradox_of_value [|[4]] Basic Concepts of Economic Value http://www.ecosystemvaluation.org/1.01.htm