“You get what you pay for.” says the old adage.
More money= more quality/utility
Yet this is a vast simplification:
-A good can be overpriced relative to the larger market
-A good might not be necessary regardless of cost
-A good might not be useful regardless of cost
-A good might not be desirable
-The price of a good and the possession of a good might cause more trouble than it’s worth.
-Social prestige might be a major factor in a purchase. Thus one pays a premium price for good that is far more elaborate than necessary even it is functionally inferior to a lower cost alternative or altogether unnecessary.
What do we really get when we pay? What does the amount we pay mean? What is this amount derived from?
We get a numerical value relative to the demand for a good. A price is just a result of our desires in aggregate.
What one person pays has little to do with whatever benefit or detriment a single person derives from a good.
Thus there is need for every person who uses money to assess the absolute value of a good.
A figure that relates to the average potential customer is of little help. One must consider their own situation, not that of others if they are to pursue their own best interests. Thus an absolute value is the opposite of a market price emergent from a collective average. Absolute value = the value of a good to a single individual. I call it absolute because it is the real value. If one desperately needs a good, we pay the collective value for its purchase. If we don’t need it at all, we still pay the collective value.
Thus focusing on absolute value leads us maximize the utility of each purchase relative to our individual situation. It also leads us to avoid purchases that are of secondary, minimal, or detrimental utility relative to our actual lives.
Let us say there is a person with a wallet with $100 wandering around the desert about to die of thirst. This person comes to a small shop. Inside the shop there are two items for sale.
One is a huge jug of water for $1. The other is an umbrella holder made to look like a hollowed out elephant’s foot for $100.
The cost of these items must:
-Include production costs plus a profit margin for the merchant and suppliers
-Be equal to the value emergent from aggregate demand
If the person stranded in the desert were to reason in terms of market value, the umbrella holder is a hundred times more valuable than the water. There could not be a moment’s hesitation. The person dying from thirst would buy the umbrella holder.
If this same person were to reason in terms of absolute value, the water would be worth all money available. It would be worth obtaining through non-monetary means such as theft. The umbrella holder would have a negative value because:
-Its purchase would deprive the person of water.
-It would serve no function
-It would be a burden
However, the thirsty person would be happy to pay just one dollar for the water and maximize the utility of their situation.
If the shopkeeper offered a jug of super-rare spring water for $100 the person would decline this offer and purchase the regular water instead. It would provide the exact same utility for 1/100 the price. It would also leave the person with left over money to purchase more water.
Thus a person reasoning by absolute value takes advantage of the market wherever possible while avoiding less optimal purchases altogether.