Economic Value vs. Market Value: What’s the Difference?

Economic Value vs. Market Value: An Overview

Both market value and economic value are widely used in business for various purposes. Each valuation employs different criteria in its calculations. Market value is the price of something, such as an asset that’s determined by the supply and demand of the asset in the marketplace. The economic value represents the maximum amount a customer is willing to pay for something.

Key Takeaways

• Market value is based on supply and demand and is the price or amount that someone is willing to pay in the market.
• Economic value is the measurement of the benefit derived from a good or service to an individual or a company. 
• Since economic value can be the maximum price that someone is willing to pay for a good or service, it can often be higher than market value.

Market Value

Market value is based on supply and demand and is the price or amount that someone is willing to pay in the market. A company’s stock price might trade higher or lower on an exchange based on the perceived market value by investors. If a company performs poorly, the market value will likely decline, for example.

The market value of a company’s stock price is used in determining its market capitalization. The market cap is calculated by multiplying the number of shares outstanding by the company’s stock price per share.

Market values are easy to determine for assets that are readily available and frequently bought and sold, such as stocks. However, some assets are not as easily calculated. For example, real estate assets might need an assessment from a real estate appraiser to provide a proper valuation.

Also, it is more difficult to determine the market values of companies that are not listed on public exchanges versus companies that are publicly traded. Publicly traded companies must release their financial statements to investors while private companies do not need to furnish their financials. As a result, determining the market value of a private company can involve a lengthy investigative process.

The market value of an asset or security can be impacted by several factors including economic conditions, the level of supply and demand, and the quality of the underlying asset or a company that has issued a stock.

Important

The market value of a company is often influenced by investor sentiment, often outweighing its actual financial condition or fundamentals in the short term.

Economic Value

Economic value is the measurement of the benefit derived from a good or service to an individual or a company. Economic value can also be the maximum price or amount of money that someone is willing to pay for a good or service. As a result, economic value can be higher than market value. 

The economic value is the amount an individual is willing to pay for a good or service while considering the money could be spent elsewhere. However, the economic value can change if the price of the good or service changes.

If the price of a product rises significantly, individuals might no longer buy the product leading to a decline in its economic value. As a result, the producer of the product might lower prices since the lower economic value has led to a decline in sales of the product. 

A company might determine the economic value of its products to help set prices and forecast demand for them. However, economic value does not have a precise formula since it considers the consumer’s views of the product as well as its overall functionality.

For example, the price increase of an iPhone from Apple might have a higher economic value because so many consumers view Apple’s brand name as synonymous with high-quality products. 

For a company, economic value might represent the value that the company derives from using an asset. The value may be higher or lower than the market value for a similar asset. However, economic value typically exceeds market value.

Intangible Assets and Market Inefficiencies

One key point to consider in discussing economic and market value is the role of intangible assets, such as intellectual property, customer loyalty, and brand reputation.

While market value primarily assesses the tangible factors driven by supply and demand, intangible assets often contribute to economic value.

For example, a company’s brand equity can lead customers to pay a premium for its products, elevating its perceived economic value over its market value, as noted with Apple in the example above. Businesses need to consider intangibles when considering their worth, as they can play an important role in long-term profitability.

Market inefficiencies and external influences, such as regulatory changes or technological advancements, also play an important role in economic and market value.

For example, a breakthrough in technology might have a high economic value because of its potential benefits, but its market value could remain low until those benefits are realized.

How Do You Determine Market Value?

Market value is the price that an asset would sell for in a fair, open market where all participants have equal access to pertinent information. It is the agreed-upon price between a buyer and seller when neither is under pressure to buy or sell.

What Is Human Economic Value?

Human economic value refers to the value that humans contribute to the economy or society through their skills, labor, creativity, or knowledge. It is generally measured by the impact of their work, ability to generate income, or contributions to innovation and social well-being. This value is often tied to jobs and financial output but also includes non-financial output, such as caregiving and community service.

What Is the Difference Between Market Value and Fair Value?

Market value is the price an item can be bought or sold for in the open market, determined by supply and demand. Fair value, on the other hand, is an estimated value that reflects an asset’s true worth, taking into consideration factors like market conditions. Market value shows what an asset is currently worth in the market, fair value shows its more stable, ideal worth.

The Bottom Line

Market value reflects the price determined by supply and demand, while economic value measures the maximum price someone is willing to pay for a good or service. Economic value generally exceeds market value, particularly when intangible assets, such as brand loyalty, are factored in.

Companies use these valuations to guide pricing, determine demand, and gauge profitability. While market value is more straightforward in its approach, economic value involves subjective considerations, making it important for understanding long-term potential.