Added value represents the extra features of a product, income from business operations or economic wealth a company generates from its operations. Many individuals are interested in this figure; interested groups include consumers, shareholders, owners, employees, investors, other businesses and government agencies. Additionally, added value is a classic economic concept that has different meanings among classical and Marxist economic theory. Classical economic theory sees this as the intrinsic value someone places on a good based on the supply and demand for the item. Marxist economists believe that the value comes from labor to produce the good or service.
It can be very difficult to place an accurate, quantitative figure on the added value of a good or service. Classical free market economists — such as those in the Austrian or Chicago schools of economics — believe that consumers decide the value of goods and services by paying a specific price for them. When consumers want to pay more for a good than it cost the company to make, the extra value represents profit to the company. The extra value can shift or change frequently as consumer preference can change and shift to different goods or services. Companies will need to expect lower added value as goods will not bring as much profit to the business.
Marxist theory states that added value comes from the labor it takes to produce goods and services. Consumers must pay prices that include the cost of materials and the labor paid to produce products. Under this theory, companies earn profits by adding labor charges to products that will cover the cost of labor and provide a small profit to the firm. Problems can arise as labor costs increase. This increase will result in varying prices for consumers who may not place an equal value of goods sold by firms. Therefore, it is possible that a company experiences negative growth from this theory of economics.
Outside of its economic definition, added value represents the increase in income or wealth a company can generate from its capital reserves. For example, companies can add value when they purchase more facilities or equipment to increase production. Economic wealth represents the physical items a company will retain for use throughout future years. Not only does the item itself represent economic value, but it also increases the company’s opportunities to increase income generation by using the assets purchased to produce more products at a cheaper cost.
