We live in a world of choices. From the smartphones we use and the food we eat, to the clothes we wear and the music we listen to, we make decisions based on choices every day. More often than not, our choice is based on the value of the product and, in turn, on our willingness to pay for it. As a customer, we engage in this value exchange every day. This blog post by Akshita Agarwal highlights how the definition of value is different for every customer in a market economy. You may share your thoughts/comments at the end of the blog to engage in a discussion with her.

The paradox of value is famously described by pioneering economist Adam Smith. In his treatise An Inquiry into the Nature and Causes of the Wealth of Nations (1776), Smith writes:

“The word VALUE, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called 'value in use;' the other, 'value in exchange'. The things which have the greatest value in use have frequently little or no value in exchange; and on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it”.

He explains how the price of a commodity is based not only on its value-in-use but also on its value-in-exchange. Although Smith did not name it as the ‘paradox of value’, it is commonly used to describe the paradox today. If you’re interested in reading his treatise, you may purchase the book here.

Most modern economists deal with the paradox of value by attempting to unify these considerations under the concept of utility – or, how well something satisfies a person’s wants or needs. Jeremy Bentham, a philosopher and jurist, first introduced the term ‘utility’ in the late eighteenth century in England to describe the satisfaction one receives on consumption of a product. This concept of utility went on to become the foundation of utilitarian theory, according to which all humans act in a way that maximizes their satisfaction/utility and results in maximum value addition and happiness.

The paradox of value was finally resolved around one hundred years after Smith wrote. W.S. Jevons, an economist and philosopher, introduced the concept of ‘marginal utility’ (utility derived per additional unit of a commodity) in his paper titled 'A General Mathematical Theory of Political Economy' (1862). He explained that it is not the total utility but the additional utility derived from the consumption of the last unit that matters. A commodity’s marginal utility often decreases as more of it is consumed, and so another unit of water would give less marginal utility than another unit of diamonds. For more thoughts, visit this page.

Diminishing marginal utility is a law of economics stating that as a person increases consumption of a product, while keeping consumption of other products constant, there is a decline in the marginal utility that person derives from consuming each additional unit of that product. For examples of diminishing marginal utility, refer here.

Principles of Economics is a brilliant book for beginners to start learning about economics. The economic concepts covered in the lesson fall under the broad bucket of microeconomics which, in itself, is a sub-category of economics. In case you want to learn only about microeconomics, this course offered by Khan Academy is a good starting point. For the table of contents, refer here.

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