Diamond-water paradox
Also called: Paradox of value · Topic: Consumer Behaviour, Demand and Elasticity · NCERT: Beyond NCERT
Meaning
The diamond-water paradox, also called the paradox of value, was posed by Adam Smith in 1776. Water is essential for life but cheap, while diamonds are not needed for survival but are very costly. The marginalists (Jevons, Menger and Walras) solved it in the 1870s. Price depends on marginal utility and scarcity, not on total utility. Marginal utility is the extra satisfaction from one more unit.
Example
Water is plentiful, so the extra satisfaction from one more litre is tiny, even though the total utility of all water is huge. Diamonds are scarce, so one more diamond adds a lot of satisfaction. That is why a diamond ring costs lakhs of rupees while a litre of tap water costs almost nothing.
Don't confuse with
- Veblen good: a Veblen good is demanded more at a higher price because the high price signals prestige. The paradox is about why essential goods can be cheap, not about status.
Related concepts
- Cardinal utility analysis
- Total utility
- Marginal utility
- Law of diminishing marginal utility
- Law of equi-marginal utility
- Consumer surplus