In the case of water we buy water today, but, we need to keep buying it every day for the rest of our life. Water is cheap at the margin, and therefore cheap to buy. But, the total utility of water is much higher than the total utility of diamonds. The difference is the quantity purchased and availability of supply.

There is a high marginal utilityof purchasing a diamond. Since diamond is a luxurious good. The first purchase would give higher utility.However, if you bought buy a again diamonds, this would have a significantly lower marginal utility.  If you buy a diamond every week these extra diamonds give little if any benefit. Even though it expensive good, the marginal utility diminishes.

Example :

The difference between marginal utility and total utility -The marginal utility of one diamond may be Rs.1000. But, you may only want to buy two in your lifetime. In this case, the total utility of diamonds is Rs2000.The marginal utility of one bottle of water may be rs10. But, in your lifetime, you may buy 5,000. In this case, the total utility of water is 50000.Therefore, the total utility of water is greater than diamonds – even though diamonds are more expensive.

Notes

Diamond water paradox -adam smith -The paradox of value (also known as the diamond–water paradox) is the paradox that, although water is on the whole more useful, in terms of survival, than diamonds, diamonds command a higher price in the market.