Diamond water paradox

 

     Diamond water paradox

In Economics value verses price paradox commonly known as Diamond Water paradox. Here diamond and water taken as an example, to explain the basic confusion arises about the products which we consume for necessity and which we consume as a luxury items.

This paradox explain the fact that though the necessity things are essential for life and we cannot live without it, its price is low, in spite of that luxury things are more costly. Economist like Adam smith and David Ricardo tried to find out the valuable answer for this diamond Water paradox, but they had been unable to find out a satisfaction answer of it.

This diamond Water paradox, later explained by different economists in different way they use the labor theory of value, marginal utility approaches and availability or scarcity of the product etc.

Here we are discussing one by one, this Diamond Water paradox.

Earlier micro economics theory is known as price theory, because it mainly concerned with the determination of price. Price plays a major role in micro economics theory. At present we regard value is being more or less synonymous with price but earlier value of a commodity divinely determined where price of the commodity set by men. So there was a large difference between value in use and value of exchange.

Adam Smith and David Ricardo elaborately explain this value in use and value in exchange paradox and illustrated the famous diamond water paradox. They explained that water had great value in use but less value in exchange, where diamond is less value in use but high value in exchange. Water had essential for life but its price is low where diamond had not essential for life but its price is high.

Availability and Scarcity method

According to the economists availability of water is huge in present situation respect of the diamond and the demand of scarce product is always high. Diamond is scarce among us, so its price is high. On the other hand water is huge in supply, so its price is low. Economists explain that, if we face a situation where diamond is huge in supply and water is scarce obviously, water price will be high.

Marginal utility approach

Marginal utility means, the utility that we derived to consume from one extra unit of the commodity. Suppose we take a cup of coffee and immediately after that we take a next cup of coffee, so the additional utility that we gain from the next cup of coffee is known as marginal utility .Marginal utility is always diminishing in character (we always derived less utility from the additional unit we consumed).

Alfred Marshall draw demand curve on the basis of marginal utility theory. So the demand curve is downward slopping. Marshall explained that the price of any product is not only determined by its demand but also depend on supply of the product. The intersection point of demand and supply determined the price. So as the supply of the water is huge according to demand its price is low. On the other hand supply of diamond is low, so its price is high.

Diamond water paradox

Labor theory of value

According to labor theory of value, economists explain that the value of such product is always high which product, production cost is high. In this sense the price of diamond is high because its production cost is too much higher than the water.

 Here I obviously want to clear one of your confusion, if we use two types of techniques that are traditional and modern technique to produce a particular commodity and the production cost of traditional technique is higher than the modern technique; than it does not mean that the commodity is cheaper which produced in machine.

 Let’s take an example if we produce diamond with the help of the labor and at the same time we produce same diamond in machine, then as the production cost is more in use of labor in first production than the machine in second production, what will you think the cost of same diamond is sold on higher price which is produced by labor? The answer is no, because in economics we always consider those production technique which we adopt through the time period and practices. That means if we know that machine will optimally used to production of diamond and we adopt these technique than why we pay for the traditional technique.

Value verses price paradox or Diamond water paradox plays a major point of discussions during 1850-1880.Economists able to clarify a satisfactory answer by adding labor theory into it.