Understanding the diamond-water paradox through marginal utility

Diamond Water Paradox.

ECONOMICS (GENERAL)

DIAMOND-WATER PARADOX

Sentence outline

There is a much greater utility obtained from water as compared to the utility obtained from the expensive diamonds.

Effects on the economy

The diamond-water paradox affects the economy in various ways.

Marginal utility

Consumption of the first unit tends to fulfill much more as compared to the second unit and the system continues for the subsequent units.

Market price and diminishing marginal utility

Evidently, business transaction involves a case of exchange of goods whereby there is acquisition of one commodity

Marginalists have used this to understand how a diamond's imputed value is affected by the latter, including the market price of diamonds that is also affected.

Relationship between marginal utility and the aviation industry

The aviation industry is greatly dependent on oil as a complementary good

Conclusion

Low income elasticity -- high marginal utility

High income elasticity -- low marginal utility

ABSTRACT

This paper discusses what is known as the diamond-water paradox also known as the paradox of value, and how this paradox has challenged economist as they sought a solution to the never ending illogicality and contradiction of the subject over the last three centuries. In this paper, I will go over how the diamond-water paradox affects the economy, and how this can bring one total utility. I will also discuss marginal utility, and how it relates to the aviation industry.

Introduction

The price of diamond- which is less useful as compared to water- is by far more compared to the prices of water. This has been the major source of conflicting ideas to support this as well as the surprise to also the great economists of the world, including those from the nineteenth century such as Adam Smith. The world in general seems to be still perplexed about this paradox. The surprising observation posed by this paradox of value is that even though humanity cannot do without water, the relative economic price of water is still low in contrast to the economic prices of diamonds which are relatively high. That is, there is a much greater utility obtained from water as compared to the utility obtained from the expensive diamonds (Scott, 1991).

Therefore glaring issues arises to question why water is much cheaper as compared to the diamonds. Differentiation made between marginal utility (the consumption of a good's extra unit with an aim of satisfying your needs or wants) and total utility (which is the general satisfaction obtained by consumption of a good) has proven to be a more reliable way of clarifying and looking into the paradox of the value. Hence, it is right to conclude that the total utility is the accumulation of the satisfaction amounts whereas marginal utility is obtained by adding the amount of a single unit of a commodity to reflect on the generation of an increased satisfaction (Scott, 1991).

Water is plentiful and therefore provides a total utility level that is much higher. However, a lower relative utility results for water due to its abundance, that is, a rather nuisance satisfaction is obtained from an additional unit. On the other hand, diamonds generate a limited total utility, thus a more overall satisfaction is not gained from diamonds. The law of diminishing marginal utility is therefore the reason for a lower price of water in the general essence. In addition, this law of diminishing marginal utility tends to be lesser active on diamond.

Marginal utility

As an economic term, the marginal utility of a commodity refers to what is obtained (in terms of losses and gains) an extra consumption is made or an extra unit is not consumed. In most cases, a diminishing marginal utility is portrayed in terms of preferences. That is, consumption of the first unit tends to fulfill much more as compared to the second unit and the system continues for the subsequent units. In the nineteenth century, during the marginal revolution, a crucial role was played by the marginal utility. This led to neoclassical value theory coming in to replace labor theory of value. In the neoclassical theory of value, the marginal rates of substitution in a consumption case together with the marginal rates of transformation during production of goods and services will simultaneously determine the relative prices of the goods and services. The two are taken to be equal to the economic equilibrium.

In reference to marginality, conceptualization of constraints to be margins is made. Many things tend to determine the endowment of certain opportunities within the margin or border. For instance, the physical laws such as those that may tend to deter transformation of natural resources or forms of energy; nature's accidents that will offer limitations to the availability of natural resources; and the consequential outcomes of the past decisions that a person or others may have made. Under the assumption that there is continuous divisible under the neoclassical analysis of commodities during tracking; expression of marginal concepts (marginal utility included) should be done in terms of differential calculus. Therefore a definition of marginal utility can be stated as the measures of satisfactions lost or gained relatively with a decreased or increased consumption of a unit of a commodity (Kauder, 1953).

On the other hand, employment of utility's different concepts during and after the development of notions to exploit marginal utility has taken place. Description of utility in correspondence to the point of measurement has been the common thing amongst the economists worldwide. Meaning, the utility can be quantified. Consequently, significant effects on the marginal utility theories reception and developments have resulted. Familiarity in operations that are arithmetic and entailing quantification enhance the utility concepts. Furthermore, tractability is greatly increased by differentiability assumption and continuity assumption.

Other conceptions of the utility can be found, moreover, these conceptions of the utility will be lacking even a weak quantification. However, the later are the utility conceptions that are outside the mainstream methods. For example, the non-mainstream utility theory pursued by the Austrian school is an example whereby considerations are made for the rational preference which is neglected in other instances. There is generally lack of dependence on quantification presumption by the theorists of Austrian school (who make general attribution value to the needs' satisfaction (Yousuf, 1996).

Benthamite philosophy is another example of concept where usefulness of production is equated to the pain avoidance and pleasure; furthermore, they are conceptualized as arithmetic operation subjects. Under the influence of philosophers such as John Stuart Mill, conceptualization of the utility is done in a way that it refers to pain and pleasure feelings, especially by the British economists.

Differentiations are always brought up by the contemporary mainstream economists and their theories regarding ontological questions and assumptions or mere recognition regarding conformity of preference structures regarding some rules can be approximated usefully. This is done by the commodities' association or there quantities uses. Taking into account that preference can as well be taken as a usefulness determinant, departing of this conception from the usefulness concept should not take place. Different marginal utilities may occur for diverse people regarding same object for any customary conception.

Market price and diminishing marginal utility

In a case whereby the stock flow or the flow of goods and services in a country is of lower marginal utility as compared to the commodities that the same country trade for with other country, then decision to affecting that trade is only upon the country. Evidently, business transaction involves a case of exchange of goods whereby there is acquisition of one commodity; hence, there is exchange of marginal losses and/or gains. Assuming that the marginal utility of goods of the trading partner of the country in question is stagnant (that is, is not increasing) with a corresponding diminishing marginal utility of its own goods, then an increased portion of the exports may be the only way to balance the sacrifice (Venkatesh, 2003).

A point of equality might not be possible if the import of the country is a complementary good thus forcing a situation whereby the ratios of exchange remains constant. When a trader steps in with the notion of offering a more favorable opportunity by provision of the good that is complementary is in a position to better its marginal position. In simple terms, a quantity's marginal utility in good money economy is the power of purchasing the best good or service in general. For this reason, much more critical explanation is offered for the diminishing marginal rates of substitution by the diminishing marginal utility law. Hence, the for an imperfect competition model, the demand and supply law has proven to be an essential aspect.

In explanation of the paradox of value, the diminishing marginal utility law is always used. This diamond-water paradox is mostly associated with the classical economist Adam Smith. Since the law of diminishing marginal utility doesn't inform us of the less abundance of the diamonds and that water is plenty on earth. However, marginalists have used this to understand how a diamond's imputed value is affected by the latter, including the market price of diamonds that is also affected.

Relationship between marginal utility and the aviation industry

The aviation industry is greatly dependent on oil as a complementary good and therefore, as there is soaring and rise in the prices of the same, the market price of the air tickets are also affected together with the marginal utility of the air transport. Companies concerns with the energy production are putting an extra effort even to go to the end of the world so that new supplies of oil can be discovered. As a result, oil and gas production prices are faster shooting up and the situation is further worsened by the delays experienced in the delivery process (Golbe, 1986). These effects are directly shifted to the next consumer which is the aviation industry. Thus in addition to aviation industry possessing the diamond-water paradox, the increased oil prices causes the rise in market prices of their services plus an increase in the marginal utility. Moreover, the law of diminishing marginal utility has got a minute effect if any on their services (Mark, 1962).

In trying to understand the operation of the aviation industry and its relations to the marginal utility, the issue of price determination also comes out conspicuously. This is because the prices of the air transport and other services also depends on the ability to identify different customers needs of the different groups of people; having the ability of separating them from other people; and also the aviation industry have the equipment and ability of making sure that those acquiring there services at lower prices cannot resell them. The price discrimination is founded on the basis of the purchases volume, age and time (that is, either during the peaks or the off peaks).The aviation industry also enjoys a greater consumer surplus and marginal consumer surplus of the products and services they offer. Services offered by the aviation industry have an inelastic demand therefore; the consumers tend to enjoy a greater share of the consumer surplus. A continued purchase of the services in spite of a drastic increase in price is the likely occurrence. This is due to the extra satisfaction received above the actual paid price (Mark, 1962).

Conclusion

In any particular product or service, an increase in the marginal utility will automatically cause a similar increase in the satisfaction derived from the commodity's consumption. Therefore, there is a greater possibility- even if a person's income is limited- to purchasing the item. Just as in the case of the diamond-water paradox and marginal utility, income elasticity concepts also portray the very same information. That is, low income elasticity services and products such as food, clothing, shelter and clean drinking water prove to be highest in the priority of any person. Due to higher limitations in the incomes of most of the world's population, most people spend a larger percentage of their salaries on the above necessities because they have a higher marginal utility to them. Higher income elasticity products and services for instance those offered by the aviation industry and movies of low priority to them hence possess a lower marginal utility (Global source of summaries and reviews, 2007).

Low income elasticity -- high marginal utility

High income elasticity -- low marginal utility

REFERENCE

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