The market price of a product does not just reflect the total value that
consumers place on that product; supply also matters. The graph
presents hypothetical demand curves for water and diamonds. The total
value that consumers place on units of water, as shown by the total
shaded area under the demand curve, is great. The total value that
consumers place on units of diamonds is shown by the total shaded
area under the demand curve for diamonds. This is clearly less than the
total value placed on water.
The large supply of water makes water plentiful and makes water low in
price, as shown by in part (i) of the figure. The relatively low supply of
diamonds makes diamonds scarce and keeps diamonds high in price, as
shown by in part (ii) of the figure. The high total value for water,
combined with its low price, leads to a large consumer surplus for water.
For diamonds, the low total value and high price lead to a small consumer
surplus.
The next part of resolving this paradox is to distinguish between the
marginal value and the total value of water and diamonds. Since water
has a low price, consumers will use water to the point where the marginal
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