One of the most celebrated mystifiers in economic theory is why Diamonds are more expensive than H2O. In our instance we consider GOLD in instance of DIAMONDS. Water is indispensable for life ; it is so utile that without its ingestion one can non populate or last. On the other manus. diamonds. though attractive and beautiful. satisfy less human of import demands than H2O. Then. how it can be that in the market a less utile trade good like diamonds is so expensive and a utile trade good as H2O is really inexpensive. Some minds in the past therefore complained that something was incorrect with the market system which determines high monetary value of trade goods such as diamond. gold etc. which are least utile and low monetary value of a trade good such as H2O which is necessary and extremely utile. Therefore. this came to be known as water-diamond paradox. However. for modern economic experts there is no paradox approximately it as they are able to explicate the big monetary value derived function between H2O and diamond.
The impression of fringy public-service corporation or fringy benefit of a trade good and the constructs of consumer excess based on it can be used to decide the water-diamond paradox. The fringy benefit or fringy rating per liter of H2O for the consumer is really low as the existent supply of H2O per period is big. On the other manus. the fringy public-service corporation or fringy benefit of diamonds is really high because the sum of diamond really available is really little. If. in fact. merely a few liters of H2O were available. fringy rating of H2O would hold been much greater than that of diamonds. Note that fringy rating of a trade good reflects how much sum of money consumer is prepared to pay for a trade good. This indicates fringy public-service corporation or utilize value of the trade good for the consumer. It is deserving observing that downward inclining demand curve for a trade good can be interpreted as demoing the fringy rating or fringy public-service corporation in footings of money to the consumer of assorted units of a trade good. If the measure really available of a trade good in the market is really big. its fringy rating or fringy public-service corporation will be really little. though its entire usage value or entire benefit may be really big. On the other manus. as the really available measure of a trade good such as diamonds. gold etc is really little. it’s fringy rating or fringy public-service corporation is really high. though it’s entire value –in-use or entire public-service corporation is little.
Market Price of a trade good is determined non by it’s entire use-value but by it’s fringy rating or fringy public-service corporation which in bend depends on the really available measure. The entire usage value or entire public-service corporation which a consumer gets from a measure of a trade good equals the sum really paid and the consumer excess he obtains from it. In instance of H2O market monetary value as determined by it’s fringy public-service corporation is really low but consumer excess from it is really big. On the other manus. in instance of diamond due to their greater scarceness. fringy public-service corporation and therefore it’s monetary value is really high but consumer excess from it is really little. Therefore. the consumer’s excess shows that monetary value should non be confused with entire use-value of a trade good and this helps us to decide the water-diamond paradox. This is illustrated in the figure given below:
Here. consumer’s demand curve Dd depicts the fringy rating curve for diamonds. On the X-axis measure of diamonds in gms per clip period and along the Y axis fringy public-service corporation or rating and monetary value of the diamonds are measured. Since. the entire usage of the diamond is little. the demand curve is at a low degree. Suppose the measure of diamonds really available is OQd and. as will be seen from the figure. monetary value of diamond determined by demand an supply is Pd which is rather high. whereas the consumer excess peers to LAPd obtained by the consumers over and above what they really pay is little. The above figure besides illustrates the monetary value finding of H2O. Demand curve Dw stand foring fringy rating or fringy public-service corporation of different measures of H2O is at higher degree. If the measure of H2O available is a really big measure OQw. it’s fringy public-service corporation peers QwB and hence monetary value determined is OPw. Though the market monetary value of H2O is really low. consumer excess obtained by the consumers surplus will be the above monetary value line PwB which is really big compared with those of diamonds. Decision:
To sum up. the entire public-service corporation or satisfaction derived from H2O consumed is much greater compared with diamonds but it’s fringy public-service corporation is low due to it’s abundant supply. The difference is big consumer excess. On the other manus. whereas entire public-service corporation of diamonds is really little. due to it’s scarceness it’s fringy public-service corporation and hence it’s monetary value is comparatively really high as compared with H2O. The difference is really little consumer excess.