Economics Marginal Utility Questions Long
The paradox of value refers to the observation that some goods with high practical utility, such as water, have a low market value, while other goods with low practical utility, such as diamonds, have a high market value. Marginal utility theory provides an explanation for this paradox.
According to marginal utility theory, the value of a good is determined by its marginal utility, which is the additional satisfaction or utility derived from consuming one more unit of the good. The theory suggests that individuals make decisions based on the marginal utility they expect to derive from consuming additional units of a good.
In the case of water, the marginal utility of each additional unit consumed is relatively low because water is abundant and necessary for survival. As individuals consume more water, the marginal utility decreases because the additional satisfaction derived from each additional unit diminishes. Therefore, the market value of water is low because individuals are willing to pay only a small amount for each additional unit due to its low marginal utility.
On the other hand, diamonds have a high market value despite their low practical utility because their supply is limited and they are considered rare and desirable. The marginal utility of diamonds is high because each additional diamond provides a significant increase in satisfaction or utility. As a result, individuals are willing to pay a higher price for diamonds due to their high marginal utility.
In summary, marginal utility theory explains the paradox of value by considering the relationship between the marginal utility and market value of goods. Goods with high practical utility but low marginal utility, like water, have a low market value. Conversely, goods with low practical utility but high marginal utility, like diamonds, have a high market value.