Elements of Value

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For a commodity to have value, four Elements of Value must be present

 

Utility
Scarcity
Transferability
Effective Demand

 

All four elements of value must be present for a commodity to have value.

 

Utility. For a commodity or service to have value,  it must be useful.  Utility (usefulness) means it will satisfy some want, need, or desire of the potential buyer.  Real estate has utility for many reasons.

 

Scarcity.  Even if a thing has utility, it is not valuable unless it is scarce.  Air is certainly a useful for breathing but is so plentiful and easy to access that it has no value.

 

Transferability.  Even if a thing has utility and scarcity, it must be transferable to have value.  If a commodity cannot be transferred from the buyer to the seller, value cannot exist.  If the owner of a property cannot be determined, it cannot be transferred.  Without a legal owner, there can be no buyer.

 

Demand.  Demand is the desire and ability to buy (or lease) goods and services.  Desire alone is insufficient to create demand.  The ability to buy must also be present.  A Rolls Royce is certainly desirable, but demand is small.  Ability to buy is synonymous with purchasing power.

 

Don't confuse desire with utility.  Avocado appliances have all the utility anyone would need, but no one will buy one because there is no desire to own one.

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