value placed on the last unit consumed is very low. However, remember
that the total value placed on all units consumed is shown by the area
under the demand curve—which for water is very high. Diamonds, on the
other hand, have a very high market price and so consumption will stop
at a level where the marginal value placed on the last unit purchased is
equally high. For diamonds, though, the total value on all units consumed
is very low.
This paradox of value, easily illustrated with the example of water and
diamonds, also provides a good illustration of consumer surplus. Water
has a high total value and a low price, which leads to a large consumer
surplus; diamonds have a low total value and a high price, and therefore
relatively little consumer surplus.
The paradox of value can be resolved by understanding (1) the market price of a good
depends on both demand and supply, and (2) the difference between the total and marginal
value that consumers place on a good. Water has a low price and low marginal value, but a
high total value. Diamonds have a high price and high marginal value, but a low total value.The same paradox exists in many markets, including labour markets. As
we all know, professional hockey players earn many times more than
nurses and most doctors, even though most consumers probably place
more total value on health care than they do on sports entertainment. But
top-quality hockey players have a set of skills that are in much shorter
supply than even highly skilled doctors, and this difference in supply
helps to explain their different incomes. We have much more to say about
the operation of labour markets in Chapters 13 and 14 .