Diamonds VS. Water

[The_Q]

Ah, yes, the infamous diamond-water principle. What a wonderful way to start off my new year of economics! Most people who have taken economics courses know of this principle (it basically illustrates supply and demand). Quite simple, really.

Diamonds do next to nothing. All they're useful for are cutting more diamonds. Sure, you can refract light, but other less valuable crystals can do that. All they really do is look pretty and cost a lot.

Water, on the other hand, is absolutely essential for life. The average human can't go 3 days without water before he's dead. Going low on water will have immediate physical effects such as fatigue and irritability. I don't know of a creature that can survive without water affecting a certain stage of it's life. Water, however, costs very little.

Why is it that diamonds cost so much and water costs so little? It's because there are very few good diamonds. Water covers 70% of the Earth (even salt water can be turned into drinking water).

Why, then, does rarity drive the price? Well, it's not just rarity. The demand of the product also plays a role. Diamonds, for instance, are beautiful. Having diamonds boosts your social status (in theory) and diamonds carry with them symbolism. The purity of love between an engaged couple, for one. Water is also something that everyone wants. It's essential to life, remember?

The combination of rarity and desire for diamonds causes their price to soar. On the opposite end we have water, which is in high abundance and high demand, but doesn't reflect it's demand in the prices (actually, it does. In comparison to other drinks, water often costs the least. It's availability and lack of flavor drives down the price).

The same goes for me. Why is it that I don't charge you people for each view of my posts? Well, they're in a great abundance, for one. I do enjoy posting here. To add to that, I'm pretty sure it's not like you guys demand for my posts (though some of you do get rather insistent). The price is there, though. Many spend time reading them and other spend time reading and posting about them.

Actors don't get this, though. There is only one Clint Eastwood. Maybe many people who want to be him, but only one true Clint. If someone wants to cast Clint and only Clint, Mr. Eastwood would be able to drive up the price as high as he wants. He's got a monopoly on himself. The system works well until we get clones. Then poor Clint gets competition for himself.

Next time we'll cover incentives and why they matter.

Q