Why are diamonds (a luxury) so expensive while water (a necessity) is so cheap?
— The answer comes down to the relative SCARCITY of diamonds as compared with water: diamonds are very scarce (they are in short supply), whereas water is plentiful (it is in abundant supply). Even though the demand for water is much greater than the demand for diamonds, since water is necessary for our survival and diamonds are not, the supply of water is so much greater than the supply of diamonds that diamonds sell for a much higher price. — [The two diagrams shown in class are the same as the ones at the bottom of the first page of “Solutions to Problem Set 1,” handed out in class on Friday.] Changes in the equilibrium price and quantity are caused by shifts in demand and supply. Examples Ex. 1: The technology for making ketchup takes a great leap forward –> supply of ketchup increases (supply curve shifts out) Result: P decreases Q increases (namely, quantity demanded increases) Ex. 2: Health-conscious consumers start shunning ketchup as too salty –> demand for ketchup falls (
