How calculate economics value added?

Answer 1

The value added concept is a mainstay of modern economics.

Let's use a simple example:

1) A widget maker has a fixed cost of creating a widget at $5.

2) The average consumer is willing to pay $10 for a widget.

3) The widget maker sells the widget for $7.

In this case, the total "value added" is the difference between what the average customer is willing to pay ($10) and the cost of the good ($5). In this example, the value added would be: $5.

The next question: how is that value distributed?

Since the widget maker creates the widget at $5 and sells at $7, there is $2 of value going to the widget maker.

Since the average consumer is willing to pay $10 but only pays $7, there is $3 of value added to the consumer.

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Now - what if the widget maker sold the widget at $9. In this case the average consumer would not purchase the widget.

What if the widget maker sold the widget for $4? In this case the widget maker would be selling below cost (which would lead to losses).