From: jap@cbnews.cb.att.com (james.a.parker)
Newsgroups: alt.politics.economics,alt.politics.libertarian
Subject: Re: Appraisals and true value
Date: 30 Dec 92 16:27:19 GMT
Organization: AT&T

In article <C02srK.BKp@fiu.edu> feathers@serss0 (Michael Feathers) writes:
>I'm very curious about something.  Recently I bought an engagement ring for
>X amount of dollars.  An appraisal came through the mail stating that said
>ring was actually worth X + N dollars.
>
>What does this mean?  Isn't the market value of the ring the amount that
>a buyer and seller would agree upon?  

The price that buyer and seller agree upon is the market price.  However, no
two sales are precisely alike, and these differences explain the differences
in "value".

Examples:

   o In Florida after the hurricane, the market price of a small bag of ice
     was $10.  Ice had to be trucked in, and there was little of it.  The
     buyers were willing to pay the price.  At the same time, I was not.
     I could go to any number of locations and buy ice for much less, or
     even buy some electricty to run my freezer and make my own.  Different
     locations meant different local value.

   o Ten years ago, an IBM-PC with 64K memory, no hard disk, and black-and-white
     screen, cost over $2000.  Today a new machine with those same capabilities
     would be "worth" about $200.  People don't value them as much, because
     much better machines are available for  the same money.  Different times,
     means different value.

   o I can go to a major grocery store and get milk far cheaper than the
     convenience store down at the corner.  Not much difference in distance,
     but I can get it at the convenience store in five minutes vs. 20 minutes
     at the big store.  Different service levels, convenience, etc. means
     different value.

>If the value is truly X + N dollars, then why aren't there many individuals
>doing a lucrative business of buying gems at retail outlets for X dollars
>and selling them for X + N dollars to whoever believes the appraisal?

Well, if many individuals started doing it, a combination of several things
would happen:

   o The retail outlets would raise their price to X+K dollars (K<N) to a
     point where they were making more money.
   o The resellers would begin cutting out the initial retail outlet, and
     begin buying wholesale for X-R dollars (R being the retail markup).
   o The number of people who would pay X+N dollars for the gems would
     diminsh (some would wise up, some would simply be satisfied with the
     gems they had bought).

The middlemen can continue to make money only by having something the end
buyer does not:  expertise (e.g., knowledge of a cheaper price), the
willingness to spend something other than money (time, effort), the ability
to buy larger quantities, etc.

>For someone who thinks of price as an information system, this is truly
>weird.

Only if you think of price as some absolute piece of information.  It reflects
what value different people place on different things at any given moment.
It's that difference in value that makes the market work.

                                       James Parker
                                       jap@cb1focus.att.com
Newsgroups: alt.politics.economics,alt.politics.libertarian