Water versus Diamonds
“Water is more important to human life than diamonds, yet tap water suppliers are less profitable than those selling diamonds. Using the concepts in MCS Chapter 3 as well as your general knowledge, explain why this profitability difference is likely to occur.”
There are a couple of factors that come to mind when answering this question. First, lets look at the willingness to pay factor. We know from the text book that we can think of the product’s value to the customer as the highest price he/she is willing to pay in the absence of a competing product and in the context of other items to buy. In other words, the maximum amount a consumer thinks a product or service is worth. Any higher price than this means that the customer simply refuses to purchase the product. If we look at a product such as tap water, we know that in the United States this is a readily available resource; I can turn my faucet on and take a drink of water whenever I want, there are tons of substitutes, so my willingness to pay for a bottle of water will not be high. On the other hand diamonds are not a readily available resource. You could even say there is a scarcity of resources for diamonds, thus as a consumer my willingness to pay price is going to be quite high.
Next, lets look at supply and demand for these 2 products. Water is highly demanded but also highly supplied. I can get a drink of water whenever I want at home or at the office and if I cannot wait to get a drink I can always stop at a gas station and purchase a bottle of water for $1.50. If the water supplier were to try to sell bottles of water to gas stations for $5 a bottle, consumers would not buy the product, and more than likely buy a substitute or competitors product. For diamonds we know that the supply is short but demand is relatively high. It’s worth noting that diamond suppliers do an incredible job of controlling the supply to keep that price as high as possible. The Law of Supply and Demand tells us that when
There are a couple of factors that come to mind when answering this question. First, lets look at the willingness to pay factor. We know from the text book that we can think of the product’s value to the customer as the highest price he/she is willing to pay in the absence of a competing product and in the context of other items to buy. In other words, the maximum amount a consumer thinks a product or service is worth. Any higher price than this means that the customer simply refuses to purchase the product. If we look at a product such as tap water, we know that in the United States this is a readily available resource; I can turn my faucet on and take a drink of water whenever I want, there are tons of substitutes, so my willingness to pay for a bottle of water will not be high. On the other hand diamonds are not a readily available resource. You could even say there is a scarcity of resources for diamonds, thus as a consumer my willingness to pay price is going to be quite high.
Next, lets look at supply and demand for these 2 products. Water is highly demanded but also highly supplied. I can get a drink of water whenever I want at home or at the office and if I cannot wait to get a drink I can always stop at a gas station and purchase a bottle of water for $1.50. If the water supplier were to try to sell bottles of water to gas stations for $5 a bottle, consumers would not buy the product, and more than likely buy a substitute or competitors product. For diamonds we know that the supply is short but demand is relatively high. It’s worth noting that diamond suppliers do an incredible job of controlling the supply to keep that price as high as possible. The Law of Supply and Demand tells us that when