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The diamond-water paradox poses the perplexing observations: Even though water is obviously important to human activity (life cannot exist without water), the price of water is relatively low. Alternatively, diamonds are clearly much less important to human existence, but the price of diamonds is substantially higher. In other words, the utility obtained from water is obviously very great, while the utility obtained from diamonds is substantially less (refering to the picture on the entry page of economist.at: U(x) = utility function, expresses utility as a function of consumption of real goods (liters, kilograms)). Adam Smith (1723 - 1790; probably the world's most famous economist), who coined the diamond-water paradoxon came up with the wrong answer. He decided that the value of something may depend on how hard it it is to get. His theory was that diamonds are expensive because it takes a lot of labour to find them and mine them. A better answer to the paradox why diamonds are more expensive than water would be that since water is so plentyful, the marginal utility (=Grenznutzen = the derivative of U(x) with respect to x, i.e. (approx.) the extra satisfaction of wants and needs obtained from consuming one additional unit of good) of water is is relatively low. An extra liter of water provides very little additional satisfaction. To the contrast, diamonds are very scarce and the marginal utility is therefor relatively high. Maybe it's worth mentioning that if you are lost somewhere in the desert the marginal utility of water goes to infinity (and the marginal utility of diamonds may even be negative since you have to carry them with you).
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