A lovely description of the famed Paradox of Value, Adam Smith. The author, Akshita Agarwal does a great job of simplifying matters and including important vocabulary.
Can you send me your own definitions or examples of:
Concept of utility
How would you describe, for example, the paradox through a modern-day situation to a child?
00:06 Imagine you’re on a game show, and you can choose between two prizes:
00:10 a diamond
00:12 or a bottle of water.
00:14 It’s an easy choice.
00:15 The diamonds are clearly more valuable.
00:18 Now imagine being given the same choice again,
00:20 only this time, you’re not on a game show,
00:22 but dehydrated in the desert after wandering for days.
00:26 Do you choose differently?
00:28 Why? Aren’t diamonds still more valuable?
00:31 This is the paradox of value,
00:34 famously described by pioneering economist Adam Smith.
00:38 And what it tells us is that defining value is not as simple as it seems.
00:43 On the game show, you were thinking about each item’s exchange value,
00:47 what you could obtain for them at a later time,
00:50 but in an emergency, like the desert scenario,
00:52 what matters far more is their use value,
00:56 how helpful they are in your current situation.
00:59 And because we only get to choose one of the options,
01:01 we also have to consider its opportunity cost,
01:05 or what we lose by giving up the other choice.
01:08 After all, it doesn’t matter how much you could get from selling the diamond
01:11 if you never make it out of the desert.
01:14 Most modern economists deal with the paradox of value
01:17 by attempting to unify these considerations
01:20 under the concept of utility,
01:22 how well something satisfies a person’s wants or needs.
01:25 Utility can apply to anything from the basic need for food
01:28 to the pleasure of hearing a favorite song,
01:30 and will naturally vary for different people and circumstances.
01:35 A market economy provides us with an easy way to track utility.
01:38 Put simply, the utility something has to you
01:41 is reflected by how much you’d be willing to pay for it.
01:44 Now, imagine yourself back in the desert,
01:46 only this time, you get offered a new diamond or a fresh bottle of water
01:50 every five minutes.
01:52 If you’re like most people, you’ll first choose enough water to last the trip,
01:55 and then as many diamonds as you can carry.
01:58 This is because of something called marginal utility,
02:01 and it means that when you choose between diamonds and water,
02:04 you compare utility obtained from every additional bottle of water
02:07 to every additional diamond.
02:09 And you do this each time an offer is made.
02:12 The first bottle of water is worth more to you than any amount of diamonds,
02:16 but eventually, you have all the water you need.
02:19 After a while, every additional bottle becomes a burden.
02:22 That’s when you begin to choose diamonds over water.
02:25 And it’s not just necessities like water.
02:27 When it comes to most things, the more of it you acquire,
02:30 the less useful or enjoyable every additional bit becomes.
02:34 This is the law of diminishing marginal utility.
02:37 You might gladly buy two or three helpings of your favorite food,
02:40 but the fourth would make you nauseated,
02:42 and the hundredth would spoil before you could even get to it.
02:45 Or you could pay to see the same movie over and over until you got bored of it
02:49 or spent all of your money.
02:50 Either way, you’d eventually reach a point
02:52 where the marginal utility for buying another movie ticket became zero.
02:57 Utility applies not just to buying things, but to all our decisions.
03:01 And the intuitive way to maximize it and avoid diminishing returns
03:05 is to vary the way we spend our time and resources.
03:08 After our basic needs are met,
03:10 we’d theoretically decide to invest in choices
03:13 only to the point they’re useful or enjoyable.
03:15 Of course, how effectively any of us manage to maximize utility in real life
03:19 is another matter.
03:21 But it helps to remember that the ultimate source of value comes from us,
03:25 the needs we share,
03:26 the things we enjoy,
03:28 and the choices we make.