Value In Economics

Value In Economics

Value, in economics either value in use or value in exchange. The theory of value and the theory of distribution together form the theory of price. The theory of distribution deals with the determination of the prices of the factors of production; the theory of value deals with the determination of the prices of consumer goods.

The price of a commodity may be defined as its value in terms of money. The theory of value is therefore concerned with the relative prices or exchange values of commodities. Since goods are demanded because they have the power to satisfy human wants, they also have value in use. Water is valuable not because of the price it commands but because it has 'utility', the power to satisfy a human want.

The concepts of value in use and value in exchange have sometimes caused confusion. Adam Smith's paradox of value stated that many 'useful' commodities such as water had a low value in exchange, whereas much less 'useful' ones such as diamonds had high exchange values. The solution to the paradox is that the supply of some goods is scarce relative to the demand for them. Water is normally plentiful and so commands little in exchange value or price, but diamonds are relatively scarce and so have a high exchange value or price. On the other hand water in the desert is invaluable, because it is scarce, but diamonds satisfy no urgent need.

Value in use is not an intrinsic quality of a commodity but rather its capacity to satisfy a human want. For a commodity to have exchange value it must have utility (or more strictly, it must give the promise of utility so that it is desired), and it must be capable of being exchanged.

Value in exchange expresses the amount of one commodity that can be exchanged for another: so many units of X can be exchanged for so many units of V or Z. In a money economy these exchange ratios are not stated directly; the value of each good is expressed in terms of money and, given this knowledge, the exchange ratios of the commodities can be derived. If eggs cost £1.20 per dozen and butter £1.20. a pound, twelve eggs exchange for a pound of butter. The theory of value is therefore concerned with the determination of relative prices.

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Since then his writings have in turn been increasingly reinterpreted as a special case both by some followers and by some economists who had not wholly accepted his writings. The content of economics is in a state of change, and this site is therefore not a final statement of economic doctrine.

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