What is value added?
Updated: Jul 1
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
Does opportunity cost happen when you value add? If yes, how?
RELATED CONCEPT
Opportunity Cost
RELATED POST
What is opportunity cost?
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