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The Concept of a Marginal Use Value That Declines as the Rate of Consumption Increases Leads to a Powerful Insight About Consumer Behaviour

In: Other Topics

Submitted By josephineliew
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DIAMOND-WATER PARADOX:

The apparently conflicting and perplexing observation that water, which is more useful than diamonds, has a lower price than diamonds. This paradox was proposed by economists in the 1800s as a means understanding the role utility plays in the demand price of a good by differentiating between total utility and marginal utility.
The diamond-water paradox poses the perplexing observations: Even though water is obviously important to human activity (life cannot exist without water), the price of water is relatively low. Alternatively, diamonds are clearly much less important to human existence, but the price of diamonds is substantially higher. In other words, the utility obtained from water is obviously very great, while the utility obtained from diamonds is substantially less.
The key question that arises is: Why are diamonds so much more expensive than water?

Total and Marginal
Insight into, and clarification of, the diamond-water paradox results by differentiating between total utility and marginal utility.
Total Utility: This is the overall satisfaction of wants and needs obtained from consuming a good. That is, total utility is the accumulated amount of satisfaction, or the total value, generated by several units of a good.

Marginal Utility: This is the extra satisfaction of wants and needs obtained from consuming one additional unit of good. That is, marginal utility is the incremental satisfaction generated by, and the value of, a single unit of a good.
Water provides humans with an enormous amount of total utility. Water satisfies A LOT of wants and needs for A LOT of people. Water provides a high level of total utility because it is plentiful--water, water everywhere! However, because it is so plentiful, the marginal utility of water is relatively low. An extra ounce of water provides very little additional satisfaction.…...

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