Answer to Question #262625 in Management for Paia

Question

1.      Which is more critical to sustaining human life – water or diamonds? Why do firms that provide water to customers generally earn lower economic profits than firms that provide diamonds?

Answer 1

Water is clearly more critical to sustaining human life than diamonds. In economics, supply is just as important as demand when it comes to determining a purchase price in a free market. Labor theory also stated that the price of a good reflected the amount of labor and resources required to bring it to market. Smith in this theory believed diamonds were more expensive than water because they were more difficult to bring to market and although water is more useful than diamonds, there is more of it and its supply. Therefore, firms that provide water to customers generally earn lower economic performance than firms that provide diamonds because their resource is not rare. In addition, the marginal utility of water is lower than that of diamonds. This therefore explains why diamonds are more expensive than water.