Applications and ExtensionsThis is a featured page

  • DVDs and DVDPlayers:
    DVDs and DVD players are complementary goods. Price of DVDs have declined only slightly, but the price of the DVD player has decreased significantly, from $1000 from the time of its introduction to the market in 1997 to less than $100 now. The lower price for DVD players has expanded their sales and increased the demand for DVD movies. The greater technology of the DVD has made the VCR obsolete.
  • The Diamond-Water Paradox:
The paradox asks: Why would water, essential to life, be priced below diamonds, which have much less usefulness?

  • Based on the supply relativity, diamonds are much more rare and costly to produce than water; hence one of the reasons why the price is much greater despite being a luxury good.
  • Also, water provides less marginial utility than diamonds as it can be consumed readily; thus, based on the utility maximizing rule provided above (in DVDs and DVD Players), the equilibrium reached creates the price difference in prices of water and diamonds.*MU of water (low) / Price of Water (low) = MU of diamonds (high) / Price of diamonds (high)
  • The total utility of water is high since it is consumed in large quantities. On the other hand, the total utility
    of diamonds is lower than those of water due to its low consumption.
  • The relative prices of water and diamonds is related to the marginal utility, not total utility.
  • This paradox is illustrated in the graph below:

Applications and Extensions - Welker's Wikinomics Page



















  • The Value of Time:
    • consumption and production time are both valuable economic commodities because that time could have been spent on something else like earning money
    • different people rate time with differing importance;
      • businessmen who are constantly short on time will be willing to spend the extra money for a flight rather than to save money and drive
      • In developing countries they would consider goods very highly prized and carefully used, whereas in the developed countries they consider time as the most valuable factor.
  • Medical Care Purchases:
    • insurance allows the consumer to pay less of the actual price, and therefore encourages the consumer to purchase more medical care than they normally would
    • this is why so much is spent on health care

  • Cash and Noncash Gifts:
    • people are incredibly different and hence would gain satisfaction with different things. The reason people would prefer cash gifts is they can spend the cash on products or services they may enjoy more than a noncash gift they receive worth the same amount of money.



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