The great 18th century economist and philosopher Adam Smith once wrote: "Nothing is more useful than...

The great 18th century economist and philosopher Adam Smith once wrote: "Nothing is more useful than water: but it will purchase scarce any thing; scarce any thing 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."

In the late 19th century some economists posited that this apparent anomaly could be explained by the law of diminishing marginal utility. Does this serve as a genuine scientific explanation of the anomaly?

Expert Solution

Adam Smith defined Marginal Utility is as "the additional advantage or benefit that a consumer receives from the consumption of an extra unit of the good or service".

In his theory, Adam Smith said that water is an urgent necessity and even though people cannot survive without consuming the same, it is yet much cheaper in value than diamonds. It is correctly said and even evident that the same is true.

But the very reason for this was given in the 19th Century when economists said that cost of a good is decided by how scarce it is and the utility which we derive from consumption of an additional unit. While water is essential it is widely available in abundance. With consumption of an additional unit of water, you are expected to get lesser returns than the very first unit because your thirst is satisfied with one unit itself to a certain extent. The additional units thus are not required on one and on the other the resource itself is abundant which does not make the cost of one unit too high.

On the other hand, diamonds are scarce and require significant investment in labour to produce the same. An additional unit of diamond does leads to addition in utility than reduction. With extra consumption the satisfaction goes up and adding to the fact that diamonds are scarce is the reason why it is priced up and over water.

Thus, we can conclude by saying that a good or service is priced on the basis of the net benefit which the consumer gets from an additional unit as well as the availability of the same. Water being abundant does not attract the same price as diamonds which is firstly scarce and secondly adds value on each unit of consumption and does not reduce.

Please feel free to ask your doubts in the comments section.

Rahul Sunny answered 7 months ago

The great 18th-century economist Adam Smith wrote, “Little else is requisite to carry a state to...

The great 18th-century economist Adam Smith wrote, “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.” Explain how each of the three conditions Smith describes would promote economic growth.

Prior to writing The Wealth of Nations, Adam Smith wrote The Theory of Moral Sentiments (TMS)....

Prior to writing The Wealth of Nations, Adam Smith wrote The Theory of Moral Sentiments (TMS). If you recall, greed was considered evil or a sin during the feudal period. Greed will lead us to the flames of hell and so you should provide your wealth to the Catholic Church. The purpose of writing TMS was to distinguish “good greed” versus “bad greed”. In the movie Wall Street, greed is portrayed as bad as Gordo Gecko ( the character played...

Why might it be useful for a company to evaluate its prices more frequently than once...

Why might it be useful for a company to evaluate its prices more frequently than once per year? How might breakeven analysis help make it practical to carry out more frequent price evaluation?

b) Identify an economist (Adam Smith) who agrees that in general free trade is a desirable...

b) Identify an economist (Adam Smith) who agrees that in general free trade is a desirable way of organizing economic and social activity. Identify another economic concept (don't use Invisible hand) that this Economist supports. Discuss how this economic concept can help you improve your life or society. Your answer needs to provide at least three paragraphs. The first paragraph provides information about the economist. The second paragraph identifies the economic concept that you have chosen. The third paragraph discusses...

Once a company has decided to “do something different” (rather than “do nothing” or “do nothing...

Once a company has decided to “do something different” (rather than “do nothing” or “do nothing differently”), what kinds of changes can they make?

Question 1) Many economist , starting with Adam Smith in 1776 agree that free trade has...

Question 1) Many economist , starting with Adam Smith in 1776 agree that free trade has the following benefits: (select all that apply) 1. Higher standard of living 2. can lead to a more peaceful world due in part to cultural enrichment 3. More competition can lead to lower prices for consumers 4. more gold for the winners Question 2) When looking at a country's Balance of Payments, the Current Account tracks the flow of imports and exports in goods...

1. why were the classical economist after Adam Smith pessimistic about the growth and development process...

1. why were the classical economist after Adam Smith pessimistic about the growth and development process 2. what have been the major finding production function studies of the sources of growth in developing countries 3. analyze the special properties of the Cobb-Douglas production function, and how might the function be used to calculate the source of growth

Did 19th century thinkers agree with Adam Smith. How did , for instance Karl Marx view...

Did 19th century thinkers agree with Adam Smith. How did , for instance Karl Marx view the doctrine of Laissez-Faire? What were the inevitable consequences if such economic system? What were the influences of Adam Smith and his critics, like Marx, reflected in the mixed economy of the United States Today

1. There is nothing more American than the hotdog. In an effort to pay for your...

1. There is nothing more American than the hotdog. In an effort to pay for your books you have decided to set up a hotdog stand one day per week in the University XXX quad. All of the costs involved are listed below. All of these costs assume that your parents have graciously given you a grill to use. Item Cost Variable or Fixed Cost Direct Materials Manufacturing Overhead Hotdog per unit $1.00 Hotdog roll per unit $.50 Hotdog tray...

In what ways is IRR more useful than NPV? In what ways is NPV more useful...

In what ways is IRR more useful than NPV? In what ways is NPV more useful than IRR? Or you could view this question as asking for the pros and cons of each calculation.

Question