Economics

Study Notes

Paradox of Value

Level:
AS, A Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

The Paradox of Value is also known as the diamond-water paradox

Also known as the diamond-water paradox.

We understand that water is necessary to our life and that ornaments such as diamonds are not life-sustaining. But water typically has a low market price, while diamond jewellery has a high market price.

One reason is that, in most countries, water is abundant relative to demand whereas diamonds are scarce relative to demand.

The marginal utility of a diamond is often very high in part because it is used as a celebration of a life-event and also as a signal from one person to another of their commitment to each other.

  • Value in use i.e. drinking water to satisfy your thirst
  • Value in exchange – what a resource can be sold for in exchange for other products. Nothing is more useful than water: but it will purchase scarce any thing. The reverse is usually true for expensive jewellery

Changes in perceived utility from consuming different goods and services will have a direct effect on demand and also platforms used to provide the product.

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