Theory of Value
Theory of value is a term used in economics which covers all the theories included in economics that explain price of goods and services or exchange value. The basic and most important questions of the theories of economics are why the price of goods and services are priced as they are, how the price of goods and services are considered and how the correct price of goods and services can be calculated.
Theories of value
The theories of value are divided into two categories – intrinsic theory of value and subjective theory of value.
Intrinsic theory of value – intrinsic theory of value is also referred to as the theory of objective value. According to this theory of value, the values of the goods or services are not a function of subjective judgment and are contained in the objects itself. Most of these theories find the intrinsic value of an item by taking into account production process of the item and cost required in the production process.
This theory holds that the value of a company or asset is based on the underlying perception of their true value which includes all tangible and intangible aspects of the business. This value may be different from the current market value. A variety of techniques of analysis are used by value investors for the estimation of the intrinsic value of securities, hoping to find investments where the investments’ true value is more than its current market value.
Subjective theory of value – this theory is also called the theory of subjective value. According to this theory, an object will have economic value only when it can satisfy human wants and is limited in supply. The marginalist theory of value is based on this. The marginal utility theory, when explaining price is not a normative theory of value.
According to this theory, the price of an object is based on the needs and wants of human beings and not on the intrinsic value of the object. This theory also holds that an object is considered to have value only when it is useful to the members of the society. The value of the object depends on its ability to satisfy the any given individual’s wants.
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Most WantedFinancial Terms
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- Accounts Payable Turnover Ratio
- Debt Service Coverage Ratio
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