Reviewed by Sep 30, 2020| Updated on
One of the many possible ways of identifying and calculating value is economic value. Although other forms of value are often important, it is useful to consider economic values when making economic choices that involve trade-offs in resource allocation. Economic value indicators are based on people's desire.
Economists generally assume that the best judges of what they want are individuals, not the government. Thus, the economic valuation theory is based on individual preferences and choices. Despite other constraints, such as those on income or available time, people express their desires through the choices and trade-offs that they make.
The economic value of a particular item, or good, such as a bread loaf, is determined by the maximum amount of other things a person is willing to give up to have that bread loaf. When we simplify our "economy" example so that the person has only two products to choose from, bread and paratha, the value of a bread loaf would be determined by the amount of paratha that the person is willing to give up to have another bread loaf.
Consequently, economic value is measured by most people who are willing to give up on other goods and services to obtain a good, service, or state. Dollars are universally accepted measure of economic value in a market economy because the number of dollars a person is willing to pay for something tells how much of all the other goods and services that they are willing to give up to get that item. That's often called "willingness to pay."
What we want to calculate to make resource allocation choices based on economic principles is the net economic benefit of a product or a service. This is determined, for individuals, by the price people are willing to pay, beyond what they actually pay. Therefore, two products which sell at the same price may have different net benefits.