Value means the utility of a commodity. However, according to Adam Smith, the word value is used in two senses, These are explained below.
Value in Use: It is the satisfaction which an individual obtains from the use of a commodity. For example, water has a huge value in use, because it quenches the thirst. Life is impossible without it. The quality of water is the value-in-use of water.
Value in Exchange: It is the amount of goods and services which we may obtain in the market in exchange of a particular commodity. In other words, it is the price of a particular good which can be sold and bought in the market. For instance, if two kg of potatos can be obtained in exchange of one kg of carrot, then we may say that value of two kg of potatos is equal to one one of carrot.
The Paradox of Value (Diamond-Water Paradox)
Undoubtedly, water has a more utility than the diamond. In that case, how come the water is cheaper than the diamond?
Economists who realised that paradox deduce that the value can’t be explained by the utility. Then, it was understood that the paradox which was encountered here stems from the confusion between marginal utility and total utility. After the principle of marginal utility had come to existence, it was said that the value of a commodity is determined by not its total utility, instead, it is determined by its marginal utility. Because the production of diamond is difficult and it is found scarce in the earth surface, its marginal utility, hence, its price and value in exchange is high. But, its value in use is low.
On the other hand, even though the water is a vital ife-sustaining need, its marginal utility, hence, its price and value in exchange is low because it is found plenty of water in the earth surface. But its value in use is high.
