Diamond Water Paradox. Economics (General)

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.

Effects on the economy

The diamond-water paradox affects the economy in various ways. The clarifications and distinctions made between total utility and the marginal utility has been the basis of solving this puzzle and explaining the illogicality and the contradictions on how the diamond-water paradox affects the economy. It is noted that the commodities with that have prices which are directly relative to marginal utility rather than the total utility have lower prices as a result of the law of diminishing marginal utility and therefore, an economy that largely concentrates on production of this type of commodities or labor have a lesser annual growth. This is because the tendency of marginal utility being equal to the price as portrayed by the rule of the optimal purchase.

This means that to have a greater economic growth there should be the presence of commodities that have a higher marginal utility thus, higher prices and the reverse applies for economies with commodities having lower marginal utility hence, they tend to achieve lower economic growth due to the low prices that result from these commodities (Elijah, 1994). Therefore, this explains why there is relatively low price of the water- as it has a lower marginal utility- and a contrasting higher price of the diamonds- due to the higher marginal utility. Indeed, the low price of water is as a result of its great abundance in most parts of the world. With the household as the point of reference of an economy, the water prices are expected to be so low due to its low marginal utility in accordance to the law of the diminishing returns.

On the other hand, an economy that produces goods that are relatively scarce such as the diamonds will have a stronger economy. This implies that a household is likely to consume lesser quantities of diamonds. Hence, higher diamonds marginal utilities are experienced and thus consumers are willing to pay higher prices for such commodities as compared to water. Therefore, economies concentrating on the production of commodities with very high marginal utilities tend to be more stable and experience a faster growth as compared to those producing commodities with low marginal utilities because the effects of the law of diminishing marginal utility is much lesser active on the economies producing goods with higher marginal utility. This conclusion is made from the fact that commodities that are 116511 more scarce and have a higher marginal utility have high market prices notwithstanding the size of its total utility (Mishra, 2008).

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).