English
Four Properties of Economic Value: Utility, Scarcity, Transferability, and Effective Demand.
The four characteristics of value are: Utility, scarcity❓❓, Transferability, and Effective Demand.
A. Utility:
- Definition: The ability of a property to satisfy a potential buyer’s desire or need.
- Explanation: The property must have an actual use, such as a location for a house, a commercial building, an industrial building, agricultural land, mineral-rich land, or a recreational site. Without utility, the property has no economic value.
- Related Theory: marginal utility❓ - the utility derived from consuming an additional unit of a good or service decreases with increased consumption.
- Example: Land in a residential subdivision has high utility because it is suitable for building a house. Land in an uninhabited and inaccessible area has limited utility and therefore lower value.
- Formula: Utility Function:
U = f(X, Y, Z), whereUrepresents utility andX, Y, Zrepresent property characteristics affecting utility (e.g., area, location, number of rooms). - Related Experiments: Surveys of potential buyers to assess their perceptions of the utility provided by the property, and market data analysis to determine the relationship between property characteristics (affecting utility) and prices.
B. Scarcity:
- Definition: The limited availability of a property compared to the demand for it.
- Explanation: Scarcity is a fundamental element of supply and demand. Scarce properties, such as those overlooking the waterfront or located in prime locations, usually have a higher value.
- Related Theory: Law of Supply and Demand - the price of a good or service is determined by the balance of supply and demand forces.
- Example: Waterfront properties are more valuable due to their scarcity.
- Formula:
Qd = f(P)(Demand function: Quantity demanded as a function of price)Qs = f(P)(Supply function: Quantity supplied as a function of price)Qdrepresents the quantity demanded.Qsrepresents the quantity supplied.Prepresents the price.- The equilibrium point where
Qd = Qsdetermines the market price.
- Related Experiments: Market data analysis to determine the relationship between supply and demand for different types of properties and its impact on prices. Studies to assess the impact of factors limiting supply (e.g., zoning laws or building restrictions) on property value.
C. Transferability:
- Definition: The ability to transfer ownership of the property from one person to another through sale, lease, gift, or will.
- Explanation: Transferability is necessary for economic value.
- Related Theory: Property Rights - must be clear and protected by law to ensure easy and secure transfer of ownership.
- Example: Land designated by the state as national parks, which cannot be sold or purchased, is not considered to have “value” in the economic sense.
- Formula: Transaction Costs - costs associated with transferring ownership of the property (e.g., registration fees, taxes, and attorney fees). Lower transaction costs mean higher transferability.
- Related Experiments: Market data analysis to assess the impact of transaction costs on real estate turnover. Studies to assess the impact of different property laws on the transferability and value of properties.
D. Effective Demand:
- Definition: A combination of the desire to own the property and the ability to purchase it.
- Explanation: Desire must be accompanied by purchasing power.
- Related Theory: Purchasing Power - the ability of consumers to buy goods and services at current market prices.
- Example: Properties in a city with strong job opportunities and high wages are valuable due to effective demand.
- Formula: Demand Function:
Qd = f(P, I, Y), whereQdrepresents the quantity demanded,Prepresents the price,Irepresents consumer income, andYrepresents other economic variables affecting purchasing power (e.g., interest rates and unemployment rates). - Related Experiments: Market data analysis to determine the relationship between economic factors (such as income and unemployment rates) and demand for properties and its impact on prices. Studies to assess the impact of government policies (such as taxes and subsidies) on purchasing power and demand for properties.
The four value characteristics (Utility, Scarcity, Transferability, and Effective Demand) are the foundation for understanding real estate value.
Chapter Summary
The chapter addresses the core components that determine real estate value❓, asserting it is a result of the interaction of four essential characteristics: Utility, scarcity❓, Transferability, and Effective Demand.
- Utility: The property must fulfill a potential buyer’s need or desire to have value, providing a place for residence, work, agricultural production, or recreation.
- Scarcity: An abundance of the property reduces its value. Scarcity is the essence of the relationship between supply and demand.
- Transferability: The ability to transfer property ownership❓ from seller to buyer is a prerequisite for value.
- Effective Demand: This combines the desire to own the property and the purchasing power to achieve this desire. economic❓ factors significantly affect purchasing power and, consequently, real estate value.
Key Conclusions:
- Real estate value is affected by external factors and conditions.
- The four characteristics of value work together; a deficiency in any reduces the overall property value.
- Understanding these characteristics is necessary for accurate real estate valuation.
Implications:
- Real estate appraisers must understand these characteristics to determine the fair market value of properties.
- Real estate investors should analyze these characteristics before making buying or selling decisions.
- This understanding aids informed decision-making in the real estate market.
The chapter distinguishes between the concepts of value, price, and cost, clarifying that value is the theoretical worth under certain conditions, price is the actual amount paid, and cost is the amount required to create the property. It reviews types of costs such as direct and indirect costs, development and construction costs, and replacement costs.
The chapter concludes by presenting other valuation principles based on economic principles of value, including principles of supply and demand, substitution, contribution, change, highest and best use, equilibrium, and conformity.
