РефератыИностранный языкThThe DiamondWater Paradox Essay Research Paper Marginal

The DiamondWater Paradox Essay Research Paper Marginal

The Diamond-Water Paradox Essay, Research Paper


Marginal Utility: The Missing Link in the Diamond-Water Paradox.


American Heritage Dictionary describes a paradox as ?a seemingly contradictory


statement that may nonetheless be true?. I feel this definition applies to ?The


Diamond-Water Paradox?. Water is of immeasurable value to human survival, however


it has virtually little or no monetary or trade value. While this seems to be a


contradiction, it is in fact the absolute truth. On the other hand a diamond has no real


value of use to mankind, however it is one of the most sought after and expensive items


in the world. How is this? How can statements which seem so ludicrous be true? We


must take certain factors into account when answering these and other questions.


Economic status, supply and demand of a particular good, and tastes and preferences all


must be considered when determining the value of a good to any particular individual.


The fact is that what is of value to person A may be of little or no value to person B.


Smith feels that the true value of water(1) based on it?s usefulness must be the most


valuable substance in the world, for without it life as we know it would cease to exist.


However, as we all know our opinions of the usefulness of any given good is in constant


flux. What is of a high value and one point in time may be useless to us at another point


in time. Because of this fact the usefulness of what we consider to be everyday goods


(such as water) are often taken for granted.


It is definitely possible for a good to command other commodities in exchange


even if it has little or no value in use. A persons level of satisfaction received from a


good is based on certain factors, two of which are economic status, and tasted and


preferences. Referring back to ?The Diamond-Water Paradox?, a person who is of


higher economic status is more often than not going to be less concerned with the simpler


things in life. Where his next meal might come from or whether he?ll have shelter for the


night isn?t really even a thought. These people are free to pursue the ?finer things in


life?. While these items often have to value in use, they are often sought after by upper


society because they are used as a status symbol to show the wealth such a person might


possess. Knowing this fact one could argue that such items do in fact have a distinct


value in use to the purchaser, for it helps to distinguish them from common society


A persons tastes and preferences also help determine the value of a good to a


particular individual. An art lover for instance may see a piece of work that to the


average person may seem to be worthless. The art lover however may be completely


enthralled by the piece and be willing to pay top dollar to possess it. The Mona Lisa


would likely seem, to be a worthless painting to someone completely ignorant to the art


world, but as we know the piece is virtually priceless, and is known the world wide. So,


in essence, a good with seemingly no value in use may command other commodities


depending on the amount of satisfaction it gives to the buyer, and the amount of


purchasing power that buyer maintains.


There does seem to be a definite implied value judgment as it pertains to Smith?s


view of a diamonds value in use. As mentioned pre

viously, everyone values things


differently and in different ways. To some people money is the most important thing in


the world, while others seek a more spiritual source of value, such as family or religion.


It seems that Smith views an items value in terms of it?s necessity to human survival.


While it is hard to argue such a belief, we know that some people place a higher value on


things beyond the realm of human existence. Smith views a diamond as a sort of fringe


benefit, it is of no real value to us and is merely one of life?s seemingly meaningless


?extras?. He also wonders how such an item of no use can command such a high return


of exchange and be so revered since, in actuality, it has no use in determining human


survival.


People have searched for a resolution to the ?The Diamond-Water Paradox? for


years. One could attempt to resolve the paradox by attempting to use the concept of


marginal utility (MU) as it relates to total utility (TU). To a person suffering of


dehydration in the middle of the desert a glass of water would most likely have a higher


MU than any other substance know to man. He would seemingly maintain a very high


level of MU for the next few glasses of water, with each glass his TU would continue to


grow, but his MU for each glass would gradually begin to fall. He will desire each next


glass increasingly less and less. Eventually his MU for the water would reach the point


that he would receive a greater satisfaction from another good (perhaps a plane ride out


of the desert). This is how most of us feel as it pertains to water. While we are in


constant need of the substance, we seem to have a never ending supply that is available at


our simple command. Because of this we receive greater satisfaction from goods which


may, in actuality, have a lower real value to us. This helps us to maximize our consumer


optimization. Consumer optimization says if our MU for one item falls below the MU of


another item, we should choose the second item, whatever it may be. Therefor the


demand of the first good would begin to level off while the demand for another good will


begin to rise.


When looking at or measuring MU we must take into account the scarcity of the


given good. Take ?The Diamond-Water Paradox? for example. As noted, MU is the


satisfaction we get from each next unit of the good consumed. As we consume more and


more water our MU for each next unit will fall. We can eventually reach a point where


water will give us negative satisfaction. As we begin to receive each unit of diamonds


our MU will be very high. Now, as we receive each next unit of diamonds our MU will


begin to fall, but the drop-off will be much less per unit than that of the water. The


reason for this is scarcity. Scarcity as a whole makes an object much more desirable to


society because of it?s relatively high demand and worth. Obviously diamonds are much


more scarce in our world than water. As a result of this fact diamonds retain a high


monetary value in society. Here, the diamond/water tradeoff is an obvious one. If we


were to be given the choice between water and diamonds, assuming our everyday needs


for survival are being met, we would surely select the diamonds because such a high


monetary value would bring a much higher rate of exchange in the marketplace

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