Why would water, essential to life, be priced below diamonds, which have much less usefulness?
• Based on the supply relativity, diamonds are much more rare and costly to produce than water; hence one of the reasons why the price is much greater despite being a luxury good. • Also, water provides less marginial utility than diamonds as it can be consumed readily; thus, based on the utility maximizing rule provided above (in DVDs and DVD Players), the equilibrium reached creates the price difference in prices of water and diamonds.*MU of water (low) / Price of Water (low) = MU of diamonds (high) / Price of diamonds (high) • The total utility of water is high since it is consumed in large quantities. On the other hand, the total utility of diamonds is lower than those of water due to its low consumption. • The relative prices of water and diamonds is related to the marginal utility, not total utility.
