Diamond Water Paradox. Economics General  Research Paper

Length: 7 pages Sources: 10 Subject: Economics Type: Research Paper Paper: #42777408 Related Topics: Water Resources, Water, Aviation, Economic Theory
Excerpt from Research Paper :

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,...


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).


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


Elijah, J. (1994). Microeconomics: a Problem-solving Approach. Toronto: Pearson Education


Fisk, R. (2009). Energy resource depletion, currency hegemony, U.S. geostrategy, the environment and global warming. Diminishing marginal utility. Retrieved August 31, 2010,from http://www.diminishingmarginalutility.com/blog/hydrocarbon_issues/oil_contracts_ties_and_investments/

Global source of summaries and reviews. (2007). Principles of economics:

the water-diamond paradox. Retrieved August 31, 2010, from http://www.shvoong.com/social-sciences/1676758-princi http://www.thehindubusinessline.com/iw/2003/01/05/stories/2003010500241300.htm ples-economics-water-diamond-paradox/

Golbe, D. (1986). Safety and profits in the airline industry. The journal of industrial economics,

34 (3), 305-318. Retrieved August 31, 2010, from http://www.jstor.org/pss/2098573

George, S. (1950). The development of Utility theory. Journal of political economy, 58 (4), 308

Mark, G (1962). Economic theory in retrospect. Cambridge: Cambridge

Mishra, R. (2008). Industrial Economics and Management Principles. New York: Firewall


Kauder, E. (1953). Genesis of the Marginal Utility Theory from Aristotle to the End of the Eighteenth Century. Economic Journal. 63 (2), 638-50.

Scott, G. (1991). History and philosophy of social science: an introduction. London: Routledge.

Venkatesh, B. (2003). The diamond-water paradox. Retrieved August 31, 2010, from http://www.thehindubusinessline.com/iw/2003/01/05/stories/2003010500241300.htm

Yousuf, D (1996). Adam Smith and the division of labour. Retrieved…

Sources Used in Documents:

Venkatesh, B. (2003). The diamond-water paradox. Retrieved August 31, 2010, from http://www.thehindubusinessline.com/iw/2003/01/05/stories/2003010500241300.htm

Yousuf, D (1996). Adam Smith and the division of labour. Retrieved August 31, 2010, from

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