Diamond-water Paradox
They say that Diamond is a women's best friend. Yet, water which is so essential for life lacks that kind of valuation.
Why is this so ?
This is called the Diamond-water Paradox, which is set forth by Adam Smith in his book, The Wealth of Nations. He said :
"Nothing is more useful than water; but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it."
Adam Smith wasn't able to solve the paradox. But today the paradox has already been solved, leading to the discovery of one the most important theory in Economics.
Do you know what it was ? Give it a shot !
5 comments:
Supply and Demand.... We have lots of water but not a lot of diamonds. PARADOX SOLVED.
scarcity.water is abundant and also,the cost to obtain diamond is much higher than that of obtaining water.
It is the law of diminishing marginal utility. As you possess more water, the utility diminishes. However, for diamonds the utility remains constant. The same reason Gold is/was used as a monetory unit for the longest time.
it is the marginal utility of diamond that made it so precious though the total utility of diamond is almost nill but due to very high marginal utility of diamond it is so precious. Though water's total utility is very high but due to very low marginal utility it is not seems to be very precious to us.
nice blog!! and very informative too...
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regards,
shromon
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