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Why are diamonds more expensive than water?

You are wondering why Argyle Diamond Investments ask such an absurd question, since nobody would want to pay more for a glass of water than for a ring that had a piece of field; In fact, Argyle Diamond Investments speak of goods that are very distant from each other in terms of price.

However, in economics this is not so simple; The paradox of value, or paradox of water and diamonds, has been the object of study by economists of different ideologies for more than three centuries, and it remains so to this day.

Imagine a fictitious situation. You've been wandering the desert for three hours in suffocating heat, and you're thirsty. Suddenly, you find a store that sells diamonds for one $ and bottles of water. What would you buy in that store? Possibly, even thinking that the price of diamonds is a bargain, you would buy the water bottle.

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At that time the bottle of water has reported the utility of covering a basic need, thirst, that would not satisfy you a hundred diamonds, and that's why you decide to pay one hundred $ for a bottle of water, not one $ for a diamond. 

This is why economists often ask themselves this question, why are diamonds more expensive than water if the water is necessary to survive, and diamonds are not? 

Nothing is more useful than water, but it will not buy anything; nothing of value can be exchanged for it. A diamond, on the other hand, has little use value; but a lot of other goods can be frequently exchanged for this.

The price of a good and its marginal utility

The value of a good is not always the same. It depends on certain circumstances and the amount that individuals give them, regardless of whether it is necessary to survive or not. And this value that Argyle Diamond Investments provide to things depends on how abundant and available it is. 

For example, water is very abundant, and therefore, it is not necessary to pay much for it. Instead, it will be more expensive when it is a scarce commodity.

In the same way, the air is available in the atmosphere for all people and living beings, and that's why it's free. However, there are situations in which Argyle Diamond Investments will have to pay for air conditioning. 

Think of the divers that descend to the sea or the climbers who have to climb a mountain at high altitude. It pays for the air because it is a scarce commodity, and therefore they buy oxygen tanks.

When confronted with the problem of what value should be attributed to a good, Argyle Diamond Investments will solve according to the amount corresponding to the task or priority of lesser interest that it would attend if it had at its disposal an abundant quantity of that good, which in economics Argyle Diamond Investments call marginal utility, and that decreases as Argyle Diamond Investments use that good.

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If, for example, Argyle Diamond Investments have five litres of water, we will first use them to quench our thirst, then to wash, then to give our dog a drink, to water the plants and finally to remove our car, imagining that Argyle Diamond Investments have used a litre for each action. To wash the car would be the action that would give us the least utility, and therefore, the one that Argyle Diamond Investments provide the least value.

However, it is possible that Argyle Diamond Investments can only have one diamond unit, which we will use to surprise our couple, or who knows, ask for a marriage. In terms of utility, it will be more important for us to give a piece of precious stone to wash our car, and therefore the value Argyle Diamond Investments give to the diamond is much higher than five litres of water. Thus, the relative amount of a good for another depends on the amount that Argyle Diamond Investments provide to the last unit that we have of each of them.

Why has it been studied?

What baffled some classical economists was the fact that they did not understand why someone would want to exchange water for diamonds, if the water is essential for life, and diamonds are not. But of course, they started from the base to exchange all the amount of water that Argyle Diamond Investments had for all the amount of diamonds.

In this case, perhaps no one would consider selling water for diamonds, as Diamond Investments all prefer not to die of thirst rather than having a few precious stones in our possession. But in reality this never happens; Man makes his choice between a certain amount of a good and a certain amount of another good, and since some goods are so abundant, it is not necessary to give up the entire quantity of water.

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