People talk about “value” and what something is “worth” all the time. It’s a deceptively simple concept and yet one that is so often misunderstood.
The first thing that one needs to understand about value is that it is subjective. It’s different for everyone. Let me give an example.
Once upon a time, when I was able to eat fruits freely (Can’t now. Diabeted, dontcha know.) if I had an apple and someone offered me a grape in trade I’d think they were joking. After all, an apple is worth much more than a grape, right? Offer two grapes? Same thing. Three? Same. However at some point, at some number of grapes, I would be willing to make the trade. That collection of grapes would be worth more than the one apple. Presumably, there would be some number of grapes, possibly including a fractional grape, where I would be utterly indifferent about making the trade. I would be equally pleased whether I had the one apple, or the handful of grapes.
That would be the case where the grapes and the apple had equal value.
If someone else liked grapes less than I do, or liked apples more, he would only be willing to trade his apple for more grapes. In that case, for him, the apple was “worth” more grapes than it would be for me.
One might ask, which of us is right? Who’s “value” of the grapes is the correct value? The answer is “both of us”. His value is right for him. Mine is right for me. Now, this doesn’t mean that the person with grapes to offer will get fewer from me than from him. We’ll get to that in a bit.
So, we’ve established that different people can have different “values”. In this case, using grapes as a measure of value, I value the apples more highly than the other guy. But there’s another factor. How much I’ll value an apple will depend on how many apples I have. If I have a hundred apples, I would be willing to trade that hundredth one for fewer grapes. After all, I’ve still got 99 apples after the trade. That hundredth apple has less value to me than if I only had one.
The other side, of course, is the guy with the grapes also has a value assessment. If I, for instance, would be willing to trade one apple for ten grapes and the other guy would be willing to trade one apple for sixteen grapes (he really loves grapes) and the guy with the grapes wants one apple for 14 grapes (he likes grapes more than me, but not as much as the other guy) the grape guy and me could make a trade for, say, 12 grapes for one apple.
So what’s the result of that. The other apple guy doesn’t make the trade. He’s not going to give up 16 grapes worth (as he sees it) of apple for 14 grapes. He would lose value. The grape guy an me, however? I get 12 grapes for an apple which I value at 10 grapes. I come out two grapes ahead in the transaction. The grape guy? He gets an apple he values at 14 grapes only for two grapes. He comes out two grapes of value ahead as well.
This is that happens in voluntary transactions: the transaction only happens if both parties, by their own values, see themselves as gaining value. It’s the very definition of a “win-win” transaction.
Of course there are more than just two people with apples and one person with grapes. There are lots of people with grapes to sell and lots of people with apples who want grapes. This is where “market price” comes in. A person may assign a particular value to something–like I assigned 10 grapes to an apple. But they’d be more than willing to accept more if offered–like that deal of 12 grapes for the apple.
So, if you take all the people who have grapes and sort them in increasing order of how many grapes they’d be willing to trade for an apple (and note how many grapes each has to trade). And you take all the people who would trade apples for grapes and how many grapes they would accept for apples (again noting how many apples they have to trade) then look at what happens as the grapes to apple price changes.
At a high value of grapes (few grapes for one apple), anyone who would accept an apple at that price or higher will want to make the trade. Thus, almost all the people with grapes would be willing to trade. On the apple side only those willing to make the trade at that price or lower will be willing. Thus very few people with apples would be willing to trade at that price. The amount of grapes supplied at that price is far outstripped by the number demanded. On the flip side, the number of apples supplied at that price far is far outstripped by the number demanded. That’s what economists call a surplus of grapes (or a shortage of apples).
The result of this is that the apple guys can insist on more grapes per apple. Fewer people with grapes will be willing to trade at this new value, but more people with apples will be willing to make the trade. Fewer grapes supplied. More apples demanded.
At some value of grapes to the apple the number of grapes supplied equals the number demanded, and likewise for apples. This is the “market price.” It is not some arbitrary decision made by a third party. It has only secondary relationship with the amount of time and effort that goes into producing a good or service. It is the result of every individuals decisions through a system of voluntary exchanges. And it automatically changes as people’s values change. If people decide they like grapes more and applies less, the grape guys won’t be able to sell some of their grapes at the current price. The leftover (a surplus in economic terms) serves as in indicator that prices need to come down (or something needs to be done to raise the demand for grapes, or maybe grapes can be diverted to alternate uses–more jams, jellies, and wines perhaps?)
It is the operation of individual voluntary exchanges as part of a society that sets “value”. No more. And no less.