Efficiency, Price, and Value

ConsumerEfficiency

• The demand     curve is a consumer’s marginal benefit curve. Because the demand curve is     derived by maximizing utility, marginal benefit is the maximum price a     consumer is willing to pay for an extra unit of a good or service when     utility is maximized.

The Paradoxof Value

• The paradox of     value is that water, which is essential to life, costs little, but     diamonds, which are useless in comparison to water, are expensive.

• The resolution     to this paradox comes from distinguishing total utility and marginal utility.     The total utility from water is much more than from diamonds. But we have     so much water that its marginal utility is small. And we have so few     diamonds that their marginal utility is high. When a household maximizes     its utility, it makes the marginal utility per dollar spent equal for all     goods. Because diamonds have a high marginal utility, they have a high     price. Because water has a low marginal utility, it has a low price.

·        Theconsumer surplus from water exceeds the consumer surplus from diamonds.