Diamond Water Paradox Free Essay Example

Marginalism was very important in the historical development of economics. Up through the 1870s, the marginal idea had not been grasped, which led to “paradoxes” such as the diamond-water paradox. This paradox was resolved by the introduction of marginal thinking.

A modern equivalent of the diamond-water paradox: Why do basketball players get paid so much more than teachers, when teachers are so much more important? Because we have plenty of people who are capable of doing what a teacher has to do (at least at the elementary/middle/high school level), whereas we have very few people who can do what a pro basketball player does.

Not all decisions are marginal, however. Some decisions really are all-or-nothing: deciding whether to shut down your business or stay open; deciding whether to offer a new product line; deciding whether to get married; deciding whether to move to New York. For decisions like these, you need to compare the total expected benefit to the total expected cost.

2:

As in the diamond water paradox, water is less expensive than diamonds because they are readily available and an additional unit of water adds little value to the individual. On the other hand, diamonds are scarce and every additional unit adds substantial value and this is the reason it costs more than water. The same is the reason for the disparity in salaries between teachers and athletes. While teachers are available in abundance like water, athletes are rare and so they are considered to be a precious commodity like diamonds and this scarcity is the reason they are paid such enormous amounts of money each year.

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