What price Diamonds?, Wizard Award Winner Options

[Guest_Jox_*]

© Todd Congreve, 2005. I, Todd Congreve, do assert my right to be identified as the author of this work in accordance with Sections 77 and 78 of The Copyrights, Designs And Patents Act, 1988. (Laws of Cymru & England, as recognised by international treaties). This work was simultaneously copyrighted in the United Kingdom of Great Britain and Northern Ireland and the United States of America. This work is posted as an unpublished work in order to elicit critical assistance and other helpful comment, only.

Thanks to Alan, Nina, Fran and Eisa for your crit and comments.

Updated to: 23/06/2005 @ 1719

Ref: TC 0404 AF (22/06/2005)


*Graphic provided by
Celtic Castle Designs

What price diamonds?
[An Economic Paradox*]
by TC

Local food store:
sparkling water -
ninety-nine pence
for five litres -
in a bottle with
carrying handle.

Antwerp jeweller:
cut diamond -
thousands of pounds
for some sparkles -
in a pretty box with
golden flip-top lid.

Ocean lifeboat:            
fresh water -                
everything I own
for a few drops -
in my begging palms:
don’t wrap it.

(end)

===================

Ref: TC 0404 AE

What price diamonds?
[An Economic Paradox*]
by TC

Local food store -
still water:
eighty-seven pence
for five litres -
in a bottle with a
carrying handle.

London jeweller -
cut diamond:
thousands of pounds
for a few gems -
in a pretty box with
golden flip-top lid.

Ocean lifeboat -              
fresh water:                      
everything I own
for anything -
in the palms of my hands:
don’t wrap it.

(end)


A famous old piece of Economics theory is known as the “Water / Diamonds Paradox.” I hope this poem illustrates it.

For the academic...

Virtually all of Economics is predicated upon The Laws of Supply and Demand. Viz: If price is low then supply is low and demand high and if price is high then supply is high and demand low. Wherever demand and supply meet is known as “Equilibrium.” Diamonds and water seem to be able to undermine this. But of course they don’t. This is because demand depends on various factors - price of the good in question (a), prices of all other goods completing for one’s income (b-z), one’s income (Y) and one’s Preferences (“tastes”) (t).

Thus, the demand equation in Economics is: d=p(a)+p(b-z)+Y+t

So the diamonds / water paradox relates to tastes, rather than just prices.

In a life boat we couldn’t care less about diamonds (unless we’ve already gone balmy) but water is vital if we’re ever to see a diamond again. So our relative taste for water vis-a-vis  diamonds is very high. This indicates another aspect in Economics: the less one has of something one wants / needs, then the more one wants it - and the higher price one will bid for it (subject to the demand equation); the more one has of something, the less one is willing to pay for more (again, subject to the demand equation). One thing that makes Economics great fun is that everyone is different - so, unlike the Natural Sciences (Biology, Chemistry and Physics are generally taken to be those these days - plus their off-springs) Social Sciences (Economics, Politics, Ethics) have much more variable data with which to come to terms and construct theories.

Oh? Why a paradox? Simply because usually we’ll usually pay far more for diamonds - Why, when they are far less useful than water, which is, of course, essential? To further understand this concept in Economics we need to investigate Utility Theory - more specifically, marginal utility and particularly, diminishing marginal utility - but such is beyond the scope of this brief explanation.

J.



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[Guest_Jox_*]

Hi all,

Thanks for the comments. Sorry I don't have time to reply to all yet so, instead, I thought I'd just pick-up Nina's last question re: DMU. Thanks for the research, Nina. I never imagined people were that interested.

Thanks for the link - when I come back later I'll read how pizzas are experiencing DMU!

The economic concept in question here is really: Utility. In Economics, that means the satisfaction which we gain from consuming something. So a car has utility and so does a cream cake. Even if one hates cars there must be times when one would be useful. However cream cakes vary much more between individuals - I, for one, am not especially fond of them so, for me, cream cakes have a low utility. [NB “Consumption” in Economics means the use of something - not necessarily eating.]

Now, let us take the case of little Billy. He loves cream cakes and has decided to buy some with his pocket money. He actually pays £1 each for them and buys six. However, all six do not return the same utility. Suppose, for example that the first yields ten UUs (Unity of Utility); the second gives satisfaction but rather less then the first - say, perhaps, 8 UUs. The third is not as good (Billy is becoming stuffed) and yields only 4UUs. The fourth is a real effort and yields just a little satisfaction - say 1 UU. The fifth one that greedy Billy stuffs in causes him to vomit - yielding -5 UUs. He never eats the sixth so it has no utility as it was not consumed.

We now have the following table:

Cake   UUs
1        10
2        08
3        04
4        01
5       -05
6       n/a



We can now use another column to represent Total Utility. Thus:

Cake   UUs     TU
1         10      10
2         08      18
3         04      22
4         01      23
5       - 05      18
6        n/a     n/a

We can now construct a fourth column from the differences between the figures in the second. This third column is the Marginal (or change) Utility with each new cake. Thus:

Cake   UUs     TU     mU
1         10        10      +10
2         08        18      +08
3         04        22      +04
4         01        23      +01
5        -05        18      -05
6        n/a       n/a

Strictly speaking the mUs should be shown between the lines but I can't do that in this text-entry box, sorry.

You'll notice that UUs and Mu are the same figures. This is simply because both show the same thing: the change in Total Utility. We regard the Quantity and UU columns as inputs and the TU and MM columns as results.

The real fun comes when we plot the graph of Quantity (horizontal axis) against both TU and mU curves (vertical axis).

TU will build and mU will fall. However, at the point where mU becomes zero, TU will hit its zenith the it, too, will start to diminish.

There are many complex points to be made from this but the simple one is the most important - viz people's utility from consumption rises at a diminishing rate the more of something they consume. At some point they derive no additional utility and then, if they were to consume more of something they would then be worse off in satisfaction than before. My personal name for this point is “The Vomit Line.”

Why does DMU matter?

Because it enables economists to predict how many of a particular good people might buy. Such information is vital in microeconomic analysis of individual businesses and industries. It may also have a role to play in macroeconomic analysis of consumption within the economy.

You might say “it is just common sense” - and it is! It is simply the codification and analysis of something we probably all know if we think about it carefully - that we love the first one we have of something, the second is good but thereafter, we have less of a buzz from subsequent consumption. At some point we simply don’t want any more and thereafter, our total satisfaction declines if we do consume more.

Here endeth the lesson for today. Blessed be St Maynard Keynes.