Diamonds vs. Water

What is better: diamonds, or water?

In economics, there is a term called “marginal utility”

It’s the satisfaction you gain from consuming a product or service

And it’s the understanding that every product has its own marginal utility

it’s kind of like a happiness factor, and a way to quantify that happiness.

Maybe chocolate has an MU of 5 for you

Bottled water might be a 2 for you

But you REALLY like ice cream, so the MU is 10

And diamonds, well, those are very expensive, but the MU varies a lot because not everyone likes them.

Here is are the important things to understand about marginal utility:

it can change, and quickly too.

and it also diminishes.

However much you like ice cream, the first cone might give you an MU of 10, and the second cone might also be great, but if someone gave you one hundred scoops of ice cream, the marginal utility would not be “10” every time.

That’s the concept of “diminishing marginal utility”

And it also proves that marginal utility can change.

Back to the question: diamonds, vs. water.

Water generally gives you an MU of 2.

But imagine you are in a desert and you are dehydrated.

Different story.

Everything has a price.

But everything also has a marginal utility: the value provided.

Now you understand marginal utility, you will also understand why not every decision people make is out of financial incentives.

Separate price from the marginal utility and you will see a huge difference in your decision making.

Good Luck.

 

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