The Paradox of Diamond and Water
The paradox of diamond and water by Adam smith poses a situation where one is in a game. The primary and only rule of the game is to choose between a diamond and a bottle of water. The choice is quite easy; the diamond is more valuable. Take the same imagination, not imagination but rather in a desert. You would choose water over the diamond. Adam Smith calls this analogy, the “paradox of value” He tries to explain that having the best definition of value is not easy. The first case of imagination describes the exchange value of each item. The exchange value of the elements means what can be available from them at a later time. The second analogy describes the “use value.” Use value implies the importance of an item in the present time (Bowley, 1973). Getting to choose one option must put “opportunity cost” into consideration. In this case, opportunity cost means what can be lost when giving up the other option. People are willing to pay a higher price for the satisfaction that they need.
In the world of economics, economists attempt to unify the above considerations using the paradox of value. They do all these under the concept of utility. Utility refers to how a particular product meets the needs of an individual. The utility is specific to what someone needs, and it, therefore, varies from one individual to the other. There is an easy way to track utility through the market economy. In simple terms, the utility cost depends on how much someone has a high desire to and the will to get it. He or she will pay whatever it takes. Another scenario takes us back to the desert. However, this time, you will get to choose between a fresh bottle of water and a piece of the diamond after every ten minutes. Ordinarily, most people will go for enough water for making it out of the desert and then consider taking as many diamonds as possible. This scenario explains marginal utility. Marginal utility arises when an individual has the option of choosing between water and diamonds. The person will have to weigh the usefulness of every extra unit of a diamond to that of water. At the initial stages, water will have a higher value. After getting enough water for the journey, a diamond will be gradually valuable. In each case, the item with less value is a burden. The concept can be in an application in real life. The more of something you acquire, the more it becomes useless.
Economists have and are still using this paradox to solve problems in their respective financial institutions. Utility applies in virtually all aspects of our lives. The best way to maximize utility and avoid losses in businesses is to be keen on how to spend time and resources. It means that after meeting the basic things that a business needs, the focus should be on be critical things at the specific times that they are needed (Cowan, 2004). This thought can be the main point that Adam Smith brought forth in the paradox. He says that water, which is a life-sustaining utility cost next to nothing while diamond, which has no practical use, costs a fortune. The case changes from the typical situation at hand. In economics, economists apply the paradox to explain that the usefulness of the entire commodity or service does not determine its price. The determination of the expense comes from the versatility of each additional unit of a particular item. A person in a desert will pay more for water. The same case is for a person who wants diamond pieces.
Generally, the paradox of diamond and water helps economists to understand the correct definition and application of scarcity and marginal utility. Scarcity is the availability of an item or service. Marginal utility is the extra value that one gets from extra good or service. The paradox illustrates that the individual will be willing to pay more for an additional marginal cost. The same case is with the management of a business. It is advisable to look for the basic needs and after that, go for what is necessary. The usefulness of utility varies from individuals, but it is the basic rule for survival in the world of business.