4.20 Diamonds clearly satisfy less important needs than water, which is essential to life. Yet according to market prices, the essential commodity, water, is worth less than the less essential commodity, diamonds. Why would a vital com-modity such as water sell for so much less than diamonds? Does this imply that there is something wrong with a market system that values diamonds more than water? Explain using demand and supply curves for water and diamonds. In your ex-planation, distinguish between the marginal and total benefit of the two commodities.

To understand why water, which is essential for life, sells for less than diamonds in the market, we need to analyze the demand and supply curves for both commodities. Here's how we can explain it:

1. Demand and Supply Curves:
Demand curve: The demand curve represents the quantity of a good or service that consumers are willing and able to purchase at different price levels.
Supply curve: The supply curve represents the quantity of a good or service that producers are willing and able to sell at different price levels.

2. Water:
Water is considered a necessity for survival, and its demand is relatively price inelastic, meaning the quantity demanded doesn't significantly change with price fluctuations. The supply of water is relatively abundant, as it is renewable and available from various sources like rivers, lakes, or underground reservoirs. Due to this abundant supply and relatively inelastic demand, the market price for water remains relatively low.

3. Diamonds:
Diamonds, on the other hand, have a limited supply, which creates a significant demand-supply imbalance. The demand for diamonds is partially driven by their scarcity and also by their cultural and social significance, such as their use in jewelry. Additionally, the demand for diamonds is influenced by their perceived luxury and status symbol value. As a result, the demand for diamonds is relatively price elastic – meaning that changes in price can have a significant impact on the quantity demanded. This combination of limited supply and relatively elastic demand leads to higher prices in the diamond market.

4. Marginal and Total Benefit:
When considering the marginal benefit, which is the additional benefit gained from consuming one more unit of a commodity, for water, the marginal benefit decreases as consumption increases. This is due to the concept of diminishing marginal utility, where the more of a good consumed, the less additional benefit it provides.
For diamonds, the marginal benefit tends to be higher with each additional unit consumed, as the value associated with owning or possessing more diamonds often increases.

However, the total benefit, which is the overall satisfaction derived from consuming a certain quantity of a commodity, may still be higher for water compared to diamonds, despite water's lower market price. This is because water is essential for life and fulfills basic human needs, while diamonds are more of a luxury or status item.

5. Market System and Values:
The market system assigns values to goods and services based on their supply and demand dynamics. It does not necessarily imply that there is something fundamentally wrong with the market system if diamonds are valued more than water. Instead, it reflects the interplay between scarcity, demand, and subjective preferences.

In conclusion, the market system values diamonds more than water due to their limited supply, relative elasticity of demand, and cultural significance. The lower market price of water compared to diamonds does not diminish its vital role and total benefit, but rather reflects its abundance and relatively inelastic demand.