Adam Smith was puzzled by what has been called the paradox of value: diamonds are expensive but frivolous and water is cheap but necessary. Modern economists should not be puzzled by the paradox of value because a demand curve indicates that as the amount of a product increases,
its marginal value rises but its total value falls. its marginal value falls but its total value rises. both its marginal and total values rise. both its marginal and total values fall.
In the early days of economics, when economists did not understand the paradox of value, the terms value in use and value in exchange were much used. Diamonds, for example, had a low value in use but a high value in exchange, while water had a high value in use but a low value in exchange. Suppose we have Q1 units of a product selling for price P1. In this case, the value in use is
area B while value in exchange is area A + B. area B while value in exchange is price P1. area A + B while value in exchange is area A. area A + B while value in exchange is price P1.
