Final answer:
The diamond-water paradox describes how essential goods can have lower prices compared to non-essential luxury goods, due to the difference in their elasticity of demand and the paradox of value. The paradox demonstrates that usefulness does not always correspond to market price, with water being cheap despite its necessity and diamonds being expensive despite their limited practical use.
Step-by-step explanation:
According to the diamond-water paradox, some "essential" goods have lower prices than some "unimportant" goods. This paradox highlights how essential goods like water, despite their importance, often have low monetary value while non-essential goods such as diamonds may have a high monetary value. The diamond-water paradox is part of the paradox of value in economics, which showcases the discrepancy between value in use (or usefulness) and value in exchange (or market price).
The level of price is typically related to the elasticity of demand for a good. Higher priced goods are generally more elastic because a change in price has a larger proportional effect on the quantity demanded. Conversely, inexpensive goods like water tend to be inelastic because even significant price changes only cause a small change in consumption, given their essential nature.
Essentially, goods that are critical for survival, like water, might have low prices because they have an inelastic demand, meaning people need to buy them regardless of price changes. On the other hand, luxury goods like diamonds can command higher prices due to their elasticity and the subjective value or utility they provide to consumers.