# Can value be defined as any increase in consumer or producer surplus?

I know that the term Economic Value Added is an internal measure that executives use to measure the financial performance of a company, say, executing a project. However, I'm doing some research in Complex Systems, and I'm interested in the term "value" as it relates to the economic system as a whole.

I came up with a definition of adding "value" as any activity that creates or increases the consumer or producer surplus. I'm now struggling to see how this definition related to the standard definition of Economic Value Added. What are the pros and cons of my definition as against the standard EVA term? Why isn't the definition that I'm using the standard definition, at least in economics?

The standard (finance) definition of EVA is only related to the producer's side of the market. Broadly speaking, it is defined as profits minus the cost of capital.

This is closely related to the concept of producer's surplus in microeconomics which is defined as profits (P) minus fixed costs (FC). In micro-economics, fixed costs most of the time refers to the cost of capital, capital being the fixed factor of production (and labour the variable factor of production).

Producer's surplus (PS) is defined as total revenues (TR) minus variable cost (VC, cost of using labour, in an easy model VK=w*L, with w=wage; L=labourinput). Profits are, of course, total revenues minus total costs (TC), with total cost equalling fixed plus variable costs.

So, it is easy to show from these two definitions that PS really looks like the finance EVA, because, as I said, FC can be seen as the cost of capital, the fixed factor of production.

PS=TO-VC

W=TO-VC-FC

<=> W = PS - FC <=> PS = W + FC

Therefore, the PS (or, for the finance guys: EVA) is only measuring value that is created (surplus) for the producer. Just add consumper surplus (CS) to the PS and you get the total surplus of an exchange. Two remarks: 1) to get the CS you need to measure utility, CS = Utility of the goods bought - price paid for the goods. Unfortunately, this is quite impossible to measure. 2) I use "exchange" since surplus is only created when a seller sells his stuff to a buyer. CS refers to the surplus of total utility derived from the consumption of the goods above the price paid for the goods, PS refers to the benefit of producing (and selling) goods above the situation of not producing. This interpretation is equivalent to PS = TO-VC. When the producer produces and sells his product, he has profits TR-VC-FC. When he doesn't produce, but disposes of the production capacity (the capital), his profits are -FC (no revenues and no variable cost, but having the production capacity at his disposal means he has to bear the cost of capital, the FC). The producer will be producing when is PS is positive, that is, when producing creates a surplus (more profits than if he would not produce).

Notice how I prefer to use surplus (instead of added value) to adress this kind of measure for the value of an activity. This is because, in economics there is the concept of added value, which may be closer to what you're looking for. It is defined as outputs - intermediate inputs (net outputs), and thus measures the value that the producer 'adds' to his inputs when producing. It can be easily measured and is, in fact, GDP.

To sum up, these all the measures discussed:

• EVA, the finance equivalent of PS;

• total surplus = PS + CS, but with CS being unmeasurable;