What is value added?

Updated: Feb 21

The difference between the product price and cost of materials or resources used to produce it. As such, to increase value added, you should increase price or reduce cost.


This includes cost of services (labour / factor of production), raw materials used and cost of using machines (capital / factor of production) to make the end product that is sold to customers.


EXAMPLE 1:

When you buy a plane ticket form a budget airline


PRICE

Seat price - $150

Meal price - $10

Extra luggage price - $10

TOTAL PRICE = $170


As such, total price of the ticket (including meals and extra baggage) is $170


COST

Seat cost - $135

Meal cost - $7

Extra luggage cost - $8

TOTAL COST = $150


Added value = $170 - $150 = $20


What will be the added value when you only want a seat on the plane?


Do you have another example of how a product adds value? Comment below


RELATED QUESTION

  1. Does opportunity cost happen when you value add? If yes, how?


RELATED CONCEPT

  1. Opportunity Cost