My economics professor once asked us: “Are pearls valuable because people dive for them, or people dive for pearls because they’re valuable.” So which is it? - Jinx
Replace “valuable” with “expensive” and it’s easy to answer.
Pearls are expensive because of supply and demand. As with anything else, when you have high demand and low supply, the price tends to be high.
The price of just about anything is determined solely by supply and demand…
People dive for them because they’re valuable. There is a demand for pearls, because people think they look nice. Thus, pearl farms exist to serve that demand. Gold is the same thing, people think it looks nice, so they buy it, employing the people/companies that mine it.
Short answer: Statement (2) is correct as given. Statement (1) is partly correct, but should more accurately be written, "One reason why pearls are valuable is because people have to dive for them.
Long answer: Supply and demand are not single quantities but schedules of what quantity will be demanded or supplied at a given price. The demand curve curve for pearls is such that, even at fairly substantial prices, people will continue to buy them–because they look nice. The supply curve, for natural pearls at least, is such that at very low prices almost none will be supplied because you have to dive for them, and nobody is going to pearl dive for free. If I remember from the Steinbeck novel, it takes a fair amount of diving to turn up each pearl, and that labor has to be compensated–even if at low rates.
The intersection of the supply and demand curves determines the price. So the supply curve (“You have to dive for them”) is part of the reason why pearls are valuable, but not the entire reason.
The fact that pearls are valuable, however–that is, the supply and demand curves intersect at a fairly high price–is the reason why people dive for them. There is no other reason.
FDISK: I initially misread your post as “god”, not “gold”. Still makes sense though.
I think jklann offered a pretty good answer. Let me offer a different interpretation.
Go to this Java application illustrating supply & demand. Click on the shift variables link. Now, on the bottom left of the table choose “Supply and Demand”. You’ll see in the upper right of the table “Supply Shift Variable: Factor Prices”, use the menu below it to choose a 25% change. The application will now illustrate what happens when suppply inputs are more expensive.
After creating your graph, you’ll see that the price has risen (from about $6.50 to about $8) and the quantity exchanged has dropped (from about 17 to about 9). Imagine that point B is for pearl diving–the price is high because the factor input, in this case pearl divers, are expensive (it’s dangerous, difficult, etc.). You see, since it’s dangerous & difficult to get pearls, the price for them is high (when we hold all our other variables constant).
That confirms the first part: pearls are expensive because people dive for them, since it is a dangerous & high skill occupation. What about the second part? Well, I don’t know much about pearl diving, but let me take a guess here. Odds are that some people are probably really good at pearl diving, they like the work, and think the hours are good (whatever…). So, even if few people demanded pearls, and those who did weren’t willing to pay high prices for them, there’d still be people willing to get them. So the second part, that people dive for pearls because they are expensive, is probably not strictly true. Probably not true at all, really, since there will most likely be a few people who have pearl diving in their blood. Even though they like it, they’ll still be able to command a relatively high price (who else is going to do it?) that is lower than what it is now (because they’re good at it).
So, in contradiction with jklann, part (1) is correct and part (2) is incorrect. Pearls are expensive because people dive for them, but even if they weren’t expensive there’d probably be some pearl diving junkies who’d do it anyway, collecting the easiest to obtain ones, and wearing cheesy t-shirts that say things like “Pearl Divers do It Underwater” and “Be Kind to Sea Animals, Hug a Pearl Diver”.
Don’t forget that pearls are, quite likely, a Giffen good which means that they become MORE desirable as the price increases rather than less.
It is quite probable that, at low prices, not only would nobody sell them, nobody would buy them either.
Pearls are NOT Giffen goods. In all likelihood there are no Giffen goods.* A Giffen good is one for which the Marshallian demand curve is positively sloped. This is because the good is strongly inferior (ie as your income rises you want less of it) and the income effect works in the opposite direction to and outweighs the substitution effect.
What you are suggesting Shalmanese is some kind of bandwaggon or “diamond good” effect.
*[sub]At least in modern economies. Variety would have to be pretty low to make a rise in the price of rice (a candidate for being a Giffen good) reduce one’s purchasing power by so much as to get you to buy more.[/sub]
Damn you’re good, Hawthorne. Have you ever checked out the Armchair Economist Mailing List? It’s inspired by Landsburg’s The Armchair Economist (a fantastic book, in my opinion). Anyway, just a heads up, in case you hadn’t.
Austrian answer: pearls are valuable to divers who believe that the risks of acquiring a pearl outweigh their desire to remain safe. They are valuable to their owners because they believed that the pearls were worth more than their money. They are not necessarily valuable to everyone. They are of little or no value to me, for example.
I don’t understand how you get from the first sentence to the second. I mean, yeah, I agree–there are people who would pearl dive just for fun and would even pay for the privilege. Hell, people pay to go to dude ranches and do farm work. But surely the overwhelming majority of pearl diving in the world is done for profit. So why is statement (2) in the OP “not true at all” just because it’s not true for some small epsilon of hobbyists?
Good question. My reasoning basically boils down to nit-picking, and since economics is such a mathematical endeavor, I assumed that nit-picking was what the prof. was looking for.
The second part of the original question asked do “people dive for pearls because they’re valuable”? (Should that question mark be inside or outside of the end-quote?). Since it doesn’t ask “why do most people dive for pearls?” I assumed that all people was implied. (The magic of unstated assumptions.) Since I argued that even if the prices weren’t high there would be some pearl divers (but not many), I concluded that it is not true that “all people who dive for pearls do so because they have a high price.” Hence, I stated that the second part is not true.
Although this may be a cop-out, it does seem fair to say that our disagreement over the truth of the second part results from the inherent sloppiness of everyday language. I nit-picked on the second part and you did not.
Let me know if that answer seems way off–I don’t want to go through life w/ my head in my…well, you know.
Sorry, a Veblen good, not a Giffen good. Veblen goods are goods that rise in demand as price rises due to the fact that they are used primarily as a display of wealth. I believe perfume is a veblen good and things like Diamonds, sports cars and the like are also suspected to be veblen goods.
Always good to sell to the Stupid Rich.
Damn! I didn’t know there was a name for that. Thanks!