Have you ever thought why you pay a higher price for what that only looks shiny and sparkles than what that sustains your life?

So here’s Diamond- Water Paradox. What is it?

Across the globe, we will see that between water and diamond, diamond is the one that commands a higher price in the economy. Even after we know that our life is sustained by water not by diamonds, people are willing to pay even a higher price for the diamonds. This is Diamond-Water Paradox.

Why is it so?

It all depends upon the marginal utility. Marginal utility is the additional utility obtained from consuming an extra unit of a good. So, no doubt, people are only willing to pay for that good from which they are able to attain a higher marginal utility.

Now, as we all know that a plenty of water is available in most parts of the world, it is not scarce. On the other hand, diamond is very scarce, it is harder to find and attain.

That’s why, the utility from attaining an extra piece of diamond is much higher than the utility attainable from an extra glass of water. So people pay for diamonds. However, if a person is really thirsty, this paradox does not apply there.

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Investment is considered to be an asset which creates value and generates income overtime. Investment happens to be a convenient way of earning money but gold is considered to be the simplest form of investment. There is no paper work involved here. From the past many years, value of gold has only increased. People are always eager to sell it whenever its value is found to be even higher.

But still investment in gold is considered to be a bad idea. Why??

The price of gold is never attributed to any economic variable, infact its price is mostly investment driven. It has no untapped intrinsic value; it is worth only what people are willing to pay for it. Moreover, gold is not truly an asset as it does not necessarily generates income over time. A person may even suffer loss if its price decreases.

Gold is just a store of value; it doesn’t keep up with the inflation.

Gold, having the property of inert, can’t be use in any industry other than manufacturing jewellery. Its use in electronics is very limited. And so because of such reasons, it could be a bad idea.

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Trade unions, a group of workers, are more like a weapon for the disrupted workers to fight against the injustice being done to them. It is very likely that workers face issues related to their wages, safety and working rules or it might happen that high authority deprive the workers of their financial and social rights. In that case, trade unions are the ones responsible for presenting the problems faced by the workers to the authorities.  They provide a communication link between the workers and the high authority. So we can say that trade unions act as a backbone of an industry.

People favouring trade unions say that without trade unions, workers may face difficulty in presenting their problems in front of the authorities. Moreover, as industries are increasing in their sizes, a trade union, being a medium of communication, helps bringing efficiency in the industry and improves performance.

On the other hand, people against trade unions hold a view that nowadays, trade unions are being greedy. They think that trade unions work only in their own interest and doing so, they hinder the performance of the company. Furthermore, if trade unions are banned, workers could directly interact with the authority and present their problems and might explain in a much better way.

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It is a very common practice that people leave their own countries and move to some other country in search of jobs or for some other reason.

But by doing so, they would either be improving that country’s condition where they move to or must be hindering. So what impact such immigration puts down on that country’s economic condition?

Immigrants mostly consist of the working population and so they add to the labour supply of that country and the potential output capacity of country increases. Along with the increase in population of the country, the aggregate demand in the country also increases raising the demand for labour. Moreover, such immigrants prove to be helpful to meet up all the job requirements that government need. Increase in working population also helps in decreasing the ratio of retired to working people i.e, dependency ratio.

Immigrants, being from working age are also made to pay taxes to the government and thereby, help in improving the government budget of the country. But as the population of that country increases, country faces shortage of housing and so social cost of the country increases in forms of falling living standards and increasing congestion. Immigration may also result in some sort of unemployment either because they are snatching jobs from the hands of the resident of that country or they themselves are not getting jobs.

So there are both positive and negative effects of immigration on the country where they head to.

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No doubt, the crime has been risen significantly all around the globe over the past many years. But unemployment and incorrect upbringing are not the only reasons to be blamed for the existence of such a scenario, there could be many other reasons too. Even the change in human psychology due to tired and sick minds could be one of the main reasons. Seeing the situation of the country, we can well notice that people are made to work like hell across the globe.

So should there be some regulation regarding the amount of time a person is expected to devote for his official work? There are some regulations. What about introducing a ceiling on the working hours of an employee?

The ceiling on working hours will not only relax the employees from exhaustion but will also provide them with the substantial amount of time to spend on their family life and personal sphere. They will be able to take care of their health and this would definitely help them in improving their performance and the improved performance will be beneficial for the economy.

Moreover, the ceiling on working hours will put the restriction on the supply of labour and will result in the increase in demand for labour. And so it will ultimately result in creation of employment in the economy as employers will be forced to recruit more staff to carry out the operations of their firm. The ceiling would serve as a great tool to combat unemployment.

But the problem with the ceiling is that it would affect the performance of a company and even the cost incurred would be so high that small and mid-sized companies will not be able to afford it and this situation would affect the economic growth as a whole.

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In some businesses, production takes place at different levels and the manufacturing process goes through those different levels categorized as divisions such as first second and third. Each level incurs its own cost but that too, depends upon the interaction among the different divisions. The second division takes all its material from the first and transfers the improved ones to the third.

So how do they agree upon the costs and revenues incurred by each division? So we use transfer pricing strategy.

But the problem here arise is that transfer prices are subject to legal restrictions in form of fines, penalties or some other legal constraint. Assigning different custom values for tax purposes to a good is an issue here because custom authorities may not be able to accept the custom prices given by the company.

The IRS (Internal Revenue Service) may put restriction on how subsidiary liquidation costs, gains and losses from each division are recognized. Transfer pricing also affects the extent to which amount of corporate tax is paid. It may also lead to double taxation. Taxation pricing being a complicated task may induce a company to change its investment decisions confronting amount of corporate tax charged from them. Moreover, it may affect cash flow of the company and may drive down the performance of the company.

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A command economy is characterized by what how it is regulated. The state is here to regulate the economy. It is decided by the state how much of resources are to be allocated to a production of a given good. The allocation of resources is arbitrary and chaotic here. Even the price mechanism is not that simple. In a free economy, prices are determined by the competition prevailing. But here, prices are defined by the interaction between the producers and consumers.

As the economy does not begin with the price, the planner can’t anticipate the true value of the resources to be used in the production and so allocation of resources might be inefficient and the outcome may be overproduction or underproduction. But the crucial problems, here, are not associated with the overproduction or underproduction or in fact, the unemployment too because there is no choice for the workers other than to work.

The main problem is the inefficient allocation of resources. How is it to be decided how many resources to be devoted to production of a good given that relevant information of resources not known in advance?

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To be in an equilibrium position, demand and supply for a particular good need to be equal or diagrammatically, the demand and supply curve must intersect at a point. But situation arises when demand and supply tends not to be equal, there crops up the partial market failure. Partial market failure results in an inefficient allocation of resources. The complete market failure evolves when the firm is not capable of supplying good at all. There are number of factors that cause market failure.

Usually a producer is found ignorant of what impact, his decision would have, so he might end up building market failure. Externalities present also lead to the market failure. Whether a positive externality or negative externality exists in the economy, both results in divergence of social marginal cost from private marginal cost and social marginal benefit from private marginal benefit and so market failure is bound to occur.

Usually minimum wages are set to ensure that employer does not exploit employees and employees are able to fulfill their needs. But if so happens that minimum wage is set above the price level, employer lays off some workers and reduces hiring anyone else. As a result, supply for the good reduces and so demand and supply are not equal anymore, market failure arises.

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This is usually taught that once we use a thing, before throwing we should think, how could it be recycled or we can bring the same thing again into use. This way, we can save our extra costs.

In business also, rather than producing different goods separately by specialised producers, we can be more cost effective if we merge the firms and produce those different goods under a single roof i.e, resources that are used in the production of one good can be used in the other goods too. Economies of scope do not mean that it is beneficial for a firm to produce different goods rather than one single good. It just means that it is profitable for the firms to merge rather than individually producing goods at their own respective costs.

But the merging of firms is possible only when factor inputs can be reused and assets could be shared.

Economies of scope have a completely different meaning from what is conveyed by the economies of scale. Economies of scale focus only on one product. It specifies an inverse relation between the average cost of a good and the level of output.

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Every country participates in the international trade to gain something and to make benefit from it. Exchange of goods takes place between the countries. One exports a good and other imports it. A country exports a good in which it specializes.

A country specializes in a product if it is able to produce the same good at a lower cost i.e, if it can produce more of a good using less of its resources in comparison to other countries. If it is so, then the country is said to have absolute advantage in that product and the country devotes all his resources on the production of those goods in which it specialize.

A country can even specialize in a product if it can produce it at a lower opportunity cost. Opportunity cost is the benefit forgotten by choosing any other alternative. If a country can produce at an opportunity cost less than any other country, the country is said to have a comparative advantage in that product and so it exports the product and other countries imports it.

So through specialization, every country can benefit from trade.

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