Economic value

Definition

Economic value is the worth of a good or service determined by its ability to generate income or fulfill a need. It reflects the benefit that an individual or entity receives from a specific item and is often quantified in monetary terms.

5 Must Know Facts For Your Next Test

1. Economic value is different from market price; it focuses on perceived benefits.
2. Time value of money plays a crucial role in determining economic value.
3. Net Present Value (NPV) is a common method used to assess economic value over time.
4. Opportunity cost impacts the economic value calculation by considering foregone alternatives.
5. Economic value can be influenced by factors such as scarcity, demand, and utility.

Review Questions

• How does the time value of money affect the calculation of economic value?
• What is the difference between economic value and market price?
• Why is Net Present Value (NPV) important for understanding economic value?

Related terms

Net Present Value (NPV):

The present value of cash flows minus initial investment, used to assess profitability.

Time Value of Money:

A financial concept that states money available now is worth more than the same amount in the future due to earning potential.

Opportunity Cost:

The loss of potential gain from other alternatives when one alternative is chosen.