October 9, 2019

Value is different from Price

Close-up of Water Pouring in Glass by Coco Images.

When we think about value, many times we associate it with price (find the synonyms of “price” and you will find the term “value”). We put value to almost everything specially when the price is high - we value land, car, house, and jewelry not only because of its use (or utility), but because these things are considered prize possessions and can command high price. But, is there really a difference between price and value? 

In business field, it could be perceived as a waste of time to discuss the difference between price and value, since both terms are being used interchangeably in the said field. But I think there is a significant difference between the two terms, and I would argue that these terms should not be used interchangeably. Value is synonymous to the terms: "importance", "usage" and "utility"; while price is much influenced by "supply” and “demand". Value answers the questions like: what is the importance of the product? What is the usage of the product? Therefore, value is not easy to quantify compared to price. Price on the other hand is market driven and its numbers (quantity) are readily available in the market; that is, the price of a product might go up or down depending on the bid and offer price in the market.

Theoretically, price in the real world might not reflect the real value of a product. If price reflects value, then high value products must have high price. Hypothetically speaking, food has high value compared to jewelry (food is more important than jewelry); some families would readily trade any jewels to cash so that they could buy a food, yet 1 gram of gold is priced higher than 1 gram of rice. If truly price reflects the value of a product, a 1 gram of gold should not be priced higher than 1 gram of rice. Others might say that gold is more valuable than food that is why it is priced higher! In response, if truly gold is more valuable than food; if say we remove food from the economy (no any food to eat at all), then realistically speaking, miners and jewelry makers will not be able to work because there is no food to bring energy to their body, and as a result, jewelries (gold) will not exist in the market. In this case, I would not say that jewelries are more valuable than food, because the absence of food will result to absence of jewelries; but rather, I would state that jewelries can command high price compared to food. Then again, this example would prove that value is not equal to price in some cases. 

Price is market driven, whereas value is subjective or personal. A carpenter will give high value to a hammer compared to a writer; while a writer will give high value to a pen compared to a carpenter. A technologist will value personal computer compared to a mechanical watch, while a horologist will argue that the art of watch making is much valuable than automated production of computer. On the other hand, price is market driven in the sense that it can be influenced by supply and demand. Given that the supply of a product is in normal state, an increase in demand will push the price up; if consumer demand for a product is in normal state, and the supply of the said product declined – then price will go up as well. As expressed previously, it is evident that the Law of Supply and Demand is very applicable in determining prices.

Factors of production can also affect the price. Particularly, the cost of labor, land, and capital has direct effect on price; an increase in the cost of production will increase the price of the product. Factor of production is also the reason behind the Water-Diamond Paradox. Water-Diamond Paradox argues that water is more valuable than diamond and yet diamond commands higher price. The reason behind why diamond is priced higher than water is because a lot of labor and capital is required to extract diamond underneath the ground. On the contrary, water above the surface of the earth is so abundant that fewer labor and capital is required to extract the said resource. But again, I will reiterate that even though diamond commands higher price than water, it is unquestionable that water is more valuable than diamond; because non-existence of water will result to depletion of life and thus will result to in-ability to extract diamond. 

The value of our possessions should not be based on price, but rather, it should be based on how these things enhanced our life and well being.

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