Diamond-Water Paradox part 2
Earlier I posted a question on why the value of diamond is so much higher than the value of water when water is more useful. I got some answers posted by the readers : scarcity, demand and supply. To some extent I do agree with those answers. Diamonds are more scarce than water which means they have a lower supply. Which explains its high value.
But the concept which truly explains this paradox is the concept of marginalism. The marginal utility derived from a product is the change in satisfaction gained as the quantity of the product changes. Applying this to the paradox. Diamond has very high value because the marginal utility is higher than water. And extra gram of diamond gives so much more satisfaction than an extra gram of water. Imagine haven a bit more water. It wouldn't have much or even any difference to your happiness.
That's it ! Do post your questions if you have any. :)
2 comments:
water is easliy available, its cheap and its everywhere. People take it for granted. Diamonds are rare and difficult to source and people have play up the value and market it as a commodity so scare that only the haves are able to own.
Why does the marginal utility of diamonds necessaruly increase?
Its because of the knowledge that its valuble and its scarce and it can demand commodities and services.
In a barter economy, would it be necessarily true that the MU of diamond with necessarly increase vis-a-vis water?
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