Theory of value (economics)

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"Theory of value" is a generic term which encompasses all the theories within economics that explain the exchange value or price of goods and services. Key question in economic theory include why goods and services are priced as they are, how the value of goods and services comes about, and for normative value theories how to calculate the correct price of goods and services (if such a value exists). Theories of value fall into two main categories:

Intrinsic (objective) theories

see main article: Intrinsic theory of value

Intrinsic theories, as the name implies, hold that the price of goods and services is not a function of subjective judgements. An example is the labor theory of value which says that prices in a market economy are a function of how much labor was put into the production of a product.

Subjective theories

see main article: Subjective theory of value

Subjective theories hold that for an object to have economic value (a price), the object must be useful in satisfying human wants and it must be in limited supply. This is the foundation of the marginalist theory of value, of neoclassical economics. The marginal utility theory is not a normative theory of value, but simply an explanation of why things are priced as they are in a market economy.

[edit] The diamond-water paradox

see main article: Diamond-water paradox

The diamond-water paradox refers to the fact that, while water is essential for life, and diamonds only have aesthetic value, the former is vastly cheaper than the latter. Most of the different theories on value have been formulated by noted economists to solve this paradox.