Chapter 7 Price and Its Theory Learning Journal

Name: Romeo Bordallo Jr.

Subject: Microeconomic Analysis
Professor: Maria Corazon E. Mercado, DBA.

When it comes to price, I think every individual is interested. Everyone whether he is a

consumer or a producer is affected by rise or fall in prices. A consumer is anxious to find out
whether the goods he wants to buy have become cheaper or expensive. Similarly, producer is
interested in whether the prices of the products he produces and the inputs he uses, have gone
up or down.
Price theory is concerned with the economic behavior or individual consumers,
producers, and resource owners. Its explain the production, allocation, consumption and
pricing of goods and services.
I have learnt in the discussion that there are many factors to consider before you can set
a price to a certain product or commodity such as tax, government regulations, location etc.
Furthermore, I also learnt the paradox of value as described by Adam Smith as the diamond-
water paradox where diamonds command a higher price than water, yet water is essential for
life and diamonds are merely ornamentation. If we put it in reality I think to fetch water for use
is much easier compared to diamond when it is mined, cut, and cleaned, it requires labor and
tools, which add value to the price of a single diamond. However, how about with little or no
labor at all. Suppose that a man on a hike discovers a perfectly clear diamond, naturally
developed with an alluring cut. Does the diamond fetch a lower market price than an identical
diamond, which is mined, cut, and cleaned by human hands? Clearly not. A buyer does not care
about the process, but about the final product.
I have learnt in the discussion that cost does not drive price it is exactly the opposite.
Prices drive costs. Like for example with a bottle of expensive French wine. The reason the
wine is valuable is not that it comes from a valuable piece of land, is picked by high-paid
workers, or chilled by an expensive machine. It is valuable because people really enjoy drinking
good wine. People subjectively value the wine highly, which in turn makes the land it comes
from valuable and makes it worthwhile to construct machines to chill the wine.
Lastly, Subjective value can show diamonds are more expensive than water because
people subjectively value them more highly. However, it is still cannot explain why diamonds
should be valued more highly than an essential good such as water.
In my opinion, I think it is about the supply since the supply of diamond is lesser
compare to that of water but clearly, water is more valuable as an essential resource as
opposed to the luxury of owning a diamond.