Chapter 3
Value Theory

History and development of value theory

Microeconomic theories--The value of a specific item

u   Supply theories focus upon supply as the basic determinant of value--The cost of production is then the only determining factor of value.  Cost-depreciation approach.

u   Demand (Marginal utility) theories focus upon demand as the determinant of value.  Thus value is the utility derived from the latest consumer.  Income-capitalization approach.

u   Market equilibrium theories focus upon the balance between supply and demand.  Sales-comparison approach.

Macroeconomic theories

u   Mercantilism theories suggest the wealth of an area is determined by its ability to produce an export surplus.  This has been refuted by the theories of comparative advantage that have shown that areas which focus their production on items which it can produce more efficiently enjoy superior economic health.

u   Physiocrats (Agriculturalism) believe that self-sufficiency with minimum government intervention is the key to economic prosperity.  Laissez faire (Conservatives)

Macroeconomic theories (cont.)

u   Institutionalism theories believe that economic health cannot be achieved without substantial government intervention because of greed. (Liberals)

u   Keynesianism argued that people do not always consume enough by themselves to insure a healthy economy.  Consequently the government should use fiscal policy to stimulate the economy in bad times.

Money and the value concept

u   Nominal prices

u   Real Prices