Taste and Preferences

“Subjective valuations of goods and services determine the demand for them; in turn, consumers determine types of goods, quantities, and prices.”

If all economic value is determined by the subjective judgments of individuals, how do we measure relative values?

If you think that classical economics gets confusing regarding the source of value, it gets really twisted when discussing the measure of value. Quite commonly they will apply units of another economic good, e.g. money, as a unit of measure for value. This does not work because money consists of an economic good and its value rises and falls with the preferences of individuals.

Only the scales of preferences of individuals can provide a consistent measure of relative value. This measure is ordinal in nature and may not even be known to the individual until he acts.

The idea of measuring economic value using an ordinal scale makes many people uncomfortable. How can one make economic calculations based on measures that cannot be quantified? The answer lies in the concept of prices — only discovered in the process of transactions.

I will discuss the concept and importance prices in the future.