Share This Article:

Economic Definition of diamond-water paradox. Defined.

Offline Version: PDF

Term diamond-water paradox Definition: The perplexing observation that water, which is more useful than diamonds, has a lower price. If price is related to utility, how can this occur? This paradox was first proposed by classical economists in the 19th century and was subsequently used as a stepping stone for developing the notion of marginal utility and the role it plays in the demand price of a good. The paradox is magically cleared up with an understanding of marginal utility and total utility. People are willing to pay a higher price for goods with greater marginal utility. As such, water which is plentiful has enormous total utility, but a low price because of a low marginal utility. Diamonds, however, have less total utility because they are less plentiful, but a high price because of a high marginal utility.

 

« DI | differentiated »

Permalink: https://glossary.econguru.com/economic-term/diamond-water+paradox

Alphabetical Reference to Over 2,000 Economic Terms