Question

8. Explain the paradox of value (also known as the diamond-water paradox

Answer 1

ANSWER:

The paradox of value is the apparent contradiction that although water is more useful as in a way of survival than the diamonds but it is the diamonds that command higher price in the market and the reason for this is that according to the theory of marginal utility , the price at which an object trades in the market is determined neither by the amount of labor exerted in the production nor how useful is it in the whole and rather it is determined by its marginal utility and it is determined by the use to a person.

This can be easily explained as such that the total utility of the water is huge because people need it for survival but since the supply of water is large , the marginal utility of water is low and once the thirst and other necessities are fulfilled of water , any extra unit becomes less worth and since the supply of diamonds is low , there usefulness is greater then one additional unit of water which is in abundant supply and therefore the diamonds have more worth to the people and they are willing to pay more price for it.