Why do diamonds cost more than water? This was a question posed by Adam Smith, who noted that while water is essential for life, a diamond, which seems less practical, commands a higher price. The answer lies in the concept of marginal utility. Although water is crucial, it is abundant and readily available, which makes its price low. In contrast, diamonds are rare and scarce, creating high demand and perceived value. This disparity highlights how value is influenced by both scarcity and utility.

The answer lies in what economist call THE VALUE OF THE BUSINESS.

Water is only valuable when you’re in a desert and thirsty. However, if water is abundant, its value diminishes significantly. For instance, using excess water to wash the dog and car makes it seem almost valueless. This illustrates how context and availability affect perceived value, emphasizing the concept of marginal utility.

On the other hand, the more diamonds you own, the more they reflect your wealth and status. As a result, the value of diamonds increases with their rarity and the perception of luxury. This heightened value underscores the role of exclusivity and social status in determining worth.

Value is therefore subjective and contextual. The Singapore Business Federation has set up the SME committee to look into the issue of “value creation”. SMEs should re-look at their internal business strategies. They must stop competing base on price. Instead, learn to deliver services and goods like “diamonds” which people want and value.

What is the real value of a contract? It cannot be just the cost of the paper and ink. The real value of a good contract is the know-how to structure it in such a way, as to increase the profit you make and reduce the risk you take in making that profit.

Choose VanillaLaw, because we understand your business value.