The Diamond Water Paradox Analysis

The Price Elasticity of Demand is the how the demand for a product or service changes when you change the price of the product or service (Miller 2012). An example would be if a cell phone company decided to raise their prices by $10 a month, they might, in turn, see people deciding to switch to a different provider or go without a cell phone altogether. The opposite would happen if this same company decided to drop their prices $10 a month. If the company made this decision they might actually see customers from other companies leave and join this company. People that do not have cell phones might also be enticed to get a cell phone after seeing cheaper plans. As you can see the demand for a good is tied to the price of that good and the demand

The paradox states that even though water is essential to life and diamonds are not, diamonds have a value that far exceeds the value humans put on water. To better help explain this situation people have to look at the supply of water versus the supply of diamonds. The supply of water is pretty vast and can be found almost anywhere. Diamonds are far more scarce and that scarcity is part of the reason their value is higher than that of water. The other reason is that even though diamonds hold no value when it comes to sustaining life, diamonds hold great value in the image and in resale value.

The diamond-water paradox is significant in economic analysis. This paradox looks into utility, which is defined as the amount of happiness gained from consuming a good or service. If a company would look even further into marginal utility which is the change in satisfaction from consuming an extra good or service. One might see that the total utility of consuming water in more than that from purchasing diamonds, the marginal utility is much higher. A company could come to the conclusion that looking into what increases a customer's marginal utility then the company will be able to capitalize off this