Paradox of Value - A Level Economics

 

Quote: “物以稀为贵”

– 唐·白居易《小岁日喜谈氏外孙女孩满月-

Do you know that it was Mr Bai from the Tang dynasty that first discovered the Paradox of Value instead of Mr Adam Smith?

I happened to overheard a couple talking about this Chinese quote and decided to use an economic concept to describe why is this so.

Do you know why price of water is low despite that it is necessary for the sustainability of mankind?

And do you know why price of diamond is so high despite it serves no real purpose (other than to showcase engagement ring)?

The price of everything boils down to two functions: Scarcity and Satisfaction.

Water is priced low because of its abundance (no scarcity) and people derived very little satisfaction from consuming an abundant good.

However, diamond is scarce in nature and is woman’s best friend (absolute satisfaction and little in quantity). This explains why it is priced so high despite not having any practical purpose!

Now a brain teaser – supposing you are stuck in a desert and dying of thirst. You saw a Arabian trader with plenty of water sacks hung on his camel. Do you want to guess the price of the water? I will give you the answer in my regular classes! :)

 
Reference: http://education-portal.com/academy/lesson/diamond-water-paradox-in-economics-definition-examples.html#lesson