Water, which is demanded by everyone, is extremely cheap. But diamonds, who are demanded only by the very few, are incredibly expensive. The paradox is, “how can something for which there is so little demand be so expensive?” The solution to this riddle is that the value of something is based not only on the demand for it, but also on its supply. Scarcity, in other words, is a function of both supply and demand. Diamonds are incredibly expensive because, despite their limited demand, their supply is so extremely limited that they are deemed to have great value. Water, despite its high demand, is in such abundant supply that it is very cheap.
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