After all, isn’t pretty much everything just worth whatever people are willing to pay for it?
In: Economics
While in essence things are worth what people are willing to pay for them, some of the value is more tangible and “real”, based on a lot of factors like the utility, elasticity, solidity and versatility .
For example, you have rocks that can be sold as a pet for $10, as paperweights for $5 or as building materials for $0.50. Now, let’s say you buy stock from a quarry that’s been supplying pet rocks. They have their inventory valued at $6/rock, so everyone thinks there’s a $4 profit to be made per rock, but what would happen if the demand for pet rocks vanished?
Housing is another clear example. Interests rates are very low right now, which means people are able to borrow higher amounts. Sellers know this, so they increase the price to balance supply and demand. People see the increase in prices and think they can make a profit by flipping houses and by doing so, they increase demand which in turn increases the prices even higher. Suddenly a house that was worth $100,000 is now being sold for $300,000. But what is the real value if the FED raises interest rates? They are one uncontrollable decision away from going back to “normal”.
Economists consider as many factors as they want and create a model that is meant to assign probability of different scenarios. Of course, they are often wrong. Tesla can be both described as grossly inflated because it would take decades for the company to realize it’s value with the rate of profits it has, or it can be considered a solid investment because they spearhead an industry that is growing incessantly.
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