DEFINITION: “Depreciation” is a decrease in the market value of a good over time. It is the opposite of “appreciation.”
ETYMOLOGY: The noun “depreciation” and the related verb “depreciate” derive from the Late Latin past participle, depreciatus, of the verb depretio, depretiare, meaning “to depreciate.”
The Late Latin term was assembled from the classical Latin preposition dē, meaning “down from” or “away from,” and noun pretium, pretii, meaning “worth,” “value,” or “price.”
USAGE: The word “depreciate” entered the English language during the fifteenth century.
Thus, the term—and the phenomenon—arose in conjunction with the development of long-distance trade routes, which led to the discovery of the New World and to international trade networks.
The Age of Exploration, in turn, was a decisive factor in the explosion of the market economy in Europe that occurred during the late Middle Ages and the Renaissance.
This historical context provides the indispensable background for understanding why the concept and reality of depreciation came into being when and where they did. However, knowing the history alone is not enough to understand depreciation. One must also be familiar with the subjective theory of value.
There are several different reasons why goods and commodities may lose their market value with the passage of time.
One reason is that the goods themselves may deteriorate. This is the form of depreciation that most people are familiar with, through the standard tax deductions that rental property owners and others may take on their federal and state income tax forms.
Perishable commodities such as food items deteriorate, as well, which is why many grocery stores offer day-old bread and other old items at a steep discount. This is a somewhat different sense of depreciation.
Another reason why goods may lose their value is that fashions change. Many retail businesses, such as bookstores and clothing stores, may offer last season’s stock at a steep discount. This is another type of depreciation.
Yet another familiar form of depreciation is the large loss in the market value that a new car undergoes as soon as it is driven off the lot. Here, there is deterioration as such, or even change in fashion. Rather, the depreciation is due to the preference of people for brand-new cars (and, perhaps, their distrust of used-car dealers).
What all these examples of depreciation have in common is the reluctance of customers to pay the same price in the present that they would have been willing to pay in the past for the same commodity, due to their preference for new, fresh, and/or fashionable goods.
In short, economic value is created by the subjective preferences of consumers, and consumers prefer what is new.