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MENTAL MODEL · M7413

Paradox of Value

Paradox of Value
BusinessHigh supportEconomics
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Version 1.0.0 · Updated 2026-07-30

CORE DEFINITION

Smith proposed that water is extremely important for life yet cheap, while diamonds are almost useless yet expensive. This is explained by marginal utility rather than total utility differences.

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The paradox of value, also known as the diamond–water paradox, is the paradox that, although water is on the whole more useful in terms of survival than diamonds, diamonds command a higher price in the market. The philosopher Adam Smith is often considered to be the classic presenter of this paradox…

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Marginal utility theory explains: water has a large total quantity and low marginal utility; diamonds are scarce and have high marginal utility. Therefore, price is determined by marginal utility and scarcity, not total utility.

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Source support: Explicit

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    en.wikipedia.orghttps://en.wikipedia.org/wiki/Paradox_of_valueZH · Explicit
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