How is economic depreciation best defined?

Economic depreciation is best defined as the decrease in an asset’s value based on economic factors. This concept encompasses various elements beyond mere physical deterioration, such as changes in market demand, shifts in technology, and general economic conditions that affect how an asset is valued in relation to others on the market.

While physical deterioration does play a role in an asset's overall value, economic depreciation recognizes that the market can significantly influence valuation. For instance, even if an asset is in perfect physical condition, factors like market demand fluctuations or competitive obsolescence can lead to a decline in its worth.

Market conditions can drive value down due to changes in consumer preference, economic downturns, or innovations that render certain assets less desirable. Therefore, economic depreciation captures a broader range of influences that impact an asset's market value, highlighting its relevance in economic discussions regarding asset valuation.