The Hindu Business Line : Of price and value

The other day, my friend and I hired an auto-rickshaw to take us to the most happening mall in Chennai. The auto driver asked for Rs 25 more than the normal fare because the area we had to pass through was known for its traffic jams. After haggling with the auto driver, my friend eventually settled for a flat rate of Rs 100, though he knew that the actual fare would have come to no more than Rs 70. There is a lesson here in economics. It brings to the fore the concept of price and value. What are they?

The premium paid

Value is what you consider a product or service to be worth to you. Price is what you actually pay to buy the product or service. In the above example, my friend valued the travel at Rs 70 but paid Rs 100 for it. The difference of Rs 30 is the risk premium — paid for not subjecting himself to a faulty auto meter. The auto driver valued his time spent in the traffic jam at Rs 25 — the amount that he wanted in addition to the metered rate.

You can apply the concepts of price and value to equity trading too. You buy a stock only if the market price is lower than what you think the stock is worth. Suppose the stock trades at Rs 150. You will buy only if you feel that it will move to Rs 200 — your perceived value for the stock. The changes in stock price are nothing but the changes in our perceived value. Whether it is buying stocks, clothes or tickets to a movie show, it is all about getting value for the price.

(The author is a Chennai-based financial consultant.)

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