Economists have for a long time been concerned with the concept of “value". However, the term has almost disappeared from economic textbooks largely because economists believe that value has a number of meanings. Price determination implies that for a good to have value it must have utility, be scarce and there is a desire for it. An object that lacks utility cannot have value because utility arouses desire and the power to give satisfaction.

Desire must be backed by purchasing power in order to constitute effective demand and potential purchasers must be able to participate in the market to satisfy their desires. If these conditions are met, the price of a good determined in a market can be considered as the net present value of the future benefit of owning the good.


Adam Smith made an important distinction between value in use and value in exchange. Real estate may have one value in use and a different value in exchange. For example, a factory designed to make one product. Value in use embodies the premise that an object's value is related to its current use that is, a short run value which sits at odds with the valuation concept that the market value of land is the present value of all rents and benefits from today until perpetuity (because the title is freehold). Therefore, valuers always consider market value to be a long run value.

Value in exchange is relative, because the property is compared to other substitute goods and services. A buyer of real estate always has an opportunity cost of investment. For example, he/she could have rented and invested the capital into the business instead of buying.


Market price or value in exchange is represented by the equilibrium price determined by the supply and demand in the market. Market price is the amount actually paid in a particular transaction. This is close to the valuer's concept of market value.

The type of competition prevailing in the market is ignored in this definition. For example, no allowance is made for knowledge or prudent conduct on the part of buyer or seller, degree and type of stimulus motivating either or both, financing terms, the use for which the property is best suited or is to be put, or the length of time the property has been exposed to the market.

Valuers argue that there is consensus in the market place, and after analyzing a large number of market transactions, very few are out of line. In practice, problems with market transactions as evidence of market value rarely arise.


Market value approximates market price and value in exchange when the following conditions apply:

The valuation definition of market value in the willing buyer willing seller theory covered previously includes these necessary criteria. Most real estate transactions either meet the above criteria or the effect of missing criteria is mitigated by the role of the real estate agent and the nature of real estate.


Some real estate factors such land and buildings are relatively fixed. That is, their quantity cannot be easily changed whereas other factors, such as hours worked and seeds planted are "variable" because their quantities can be easily changed. It is not possible to increase the amount of the fixed input immediately (that is, in the short run) and therefore, production can be increased only by increasing the quantity of the variable input. Therefore, the cost of producing a marginal unit will rise and the supply curve will shift. In the long run, it will be possible to increase the amount of the fixed input. For example, new factories can be built and industrial land subdivided and if there are no further external changes, the system will again attain equilibrium.

In practice, equilibrium is rarely achieved being instead, a constantly changing target toward which the system is moving rather than a state that is maintained. That is, the real estate market is steady state. The fixed supply of land and the long life of improvements makes it particularly difficult to attain equilibrium in the real estate market.


Economists specify the periods involved. The "market" period is a short period in which the only items offered for sale are those already produced. For example, in a livestock auction those animals in the saleyards are the ones that establish the market price of stock when sold.

short run
long run