What Gives Something Value?
By Zachary A. Collier | Adapted for High School Students
Read the full articleThe Great Value Mystery
Why is one buyer willing to offer more than another for the same house? Why does a diamond cost more than water, even though you need water to live? Today, we're going to solve this mystery and learn why Value is in the mind of the beholder.
Watch: What is Subjective Value?
The DUST Components
In the world of real estate and economics, we use the acronym DUST to remember the four things something needs to have "economic value." Tap each card to reveal its secret!
D
DEMANDA buyer's belief that a good will fulfill a want or need + the ability to pay for it.
U
UTILITYThe capacity of a good to satisfy a want. It's how "useful" or "desirable" it is to you.
S
SCARCITYThere isn't enough for everyone. Limited supply necessitates trade-offs.
T
TRANSFERABILITYThe ability to exchange ownership. If it can't be traded, it can't have a market price.
Intrinsic vs. Subjective Value
Intrinsic Theory
(The Old Way)Value comes from the stuff inside the item or the labor used to make it. (If I worked hard on a mud pie, it should be valuable!)
Subjective Theory
(FEE Perspective)Value originates in the mind. It's how you react to your environment. (If no one wants my mud pie, it has zero value!)
Interactive: The Water Paradox
Water has high Utility, but depends on Scarcity for its value. Move the slider to see how value changes!
Value: Low (No scarcity)
The Magic of Trade: Mrs. Jones and the Bread
Trade happens because two people value things differently. If Mrs. Jones values bread more than $3.00, and the store values $3.00 more than the bread, they BOTH win!
Mrs. Jones
$3.00
The Store
Loaf of Bread