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What Is Economic Valuation?

Osmand Vitez
Osmand Vitez

Economic valuation is a somewhat broad term that can have different meanings. For example, economists may see it as the money a consumer pays above a product’s market price. In business, it is the total real value of a business, not the accounting figures as determined by net income. The purpose of economic valuation — in either of its methods — is to understand the concept of economic value. Hence, the term economic valuation is given to these activities.

Market economies rely on supply and demand factors to explain the price of goods and services. In short, businesses offer a specific supply of a product in order to meet the demand by consumers. As the supply or demand changes, the market price changes accordingly. For example, low supply and high demand will drive prices up, where the opposite will drive prices down, that is, high supply and low demand. When consumers pay a price over the current price as determined by supply and demand, economic valuation can determine the reason for this behavior.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

The value an individual or business places on a good is often difficult to understand. The market price states — in a general fashion — that most willing sellers and willing buyers will pay X amount for a certain product. When a consumer has a high personal demand for the product, however, he or she may pay a higher amount for the good. This typically means the consumer pays above the market price for whatever reason. In short, the consumer places a high internal value on the product in terms of economic valuation.

Businesses use economic valuation in a slightly different manner as opposed to economists and consumers. Here, a business desires information on its true value for the items it uses to run business operations. A basic economic valuation formula is total assets less total liabilities. The result — depending on it being positive or negative — indicates whether a company has an economic gain or loss. In many cases, this figure represents the price a company could command in an arm's-length transaction for liquidating the business.

Other formulas or uses for economic valuation may exist in an open market. The base principle exists, however, in that the process attempts to measure the value placed on an item by an outside individual. Unfortunately, no clear process may be available to determine why one consumer would pay one price and a different consumer would pay a different price.

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