Question

Short note diamond water paradox economics

Answer 1

Getting enough water to sustain life typically has a low price, while a piece of diamond jewelry has a high price. Why does an economy put a much lower value on something vital to sustaining life compared to something that simply looks shiny and sparkles? This question is the diamond-water paradox, also known as paradox of value, and it was first presented by the economist Adam Smith in the 1700s.

In his works, Smith points out that practical things that we use every day often have little or no value in exchange. Things like cups, utensils, socks, and water are a few examples. On the other hand, things that often have the greatest value in the market have little or no practical use. An example may be an old piece of art or 1920s baseball card. Other than looking at it, there isn't much else we can do with the art or baseball card. So, why are things valued this way?

Understanding why the paradox exists can be helped by understanding the economic terms known as marginal utility and scarcity. Scarity can be simply defined as how readily available a good, skill, or service is. Is there a lot of it compared to what people are demanding? Marginal utility is the additional satisfaction or gain someone gets from using or purchasing an additional unit of a particular good or service. 

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Answer 2

Answer:

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The paradox of value (also known as the diamond–water paradox) is the contradiction that, although water is on the whole more useful, in terms of survival, than diamonds, diamonds command a higher price in the market.