There is nothing which says wealth more than a glittering diamond. Equally, we are led to believe that there is nothing that says love more than that same diamond. This however, is a total myth, and a result of one of the cleverest business and advertising strategies the world has ever seen.
Given the high price we pay for diamonds, we are led to believe that they must be extremely rare, or as we the budding economists call; a scarce resource. The truth is though, that diamonds are not that scarce at all. Our story starts in the 1800s, when diamonds were discovered all over South Africa, flooding the market with this precious gem. When any product floods the market, this increased supply usually leads to the same outcome: less demand and lower prices. Yet somehow, the opposite happened.
Introduce Cecil Rhodes. This entrepreneurial Englishman created the De Beers Mining Company, which bought up almost all of the diamond mines across South Africa. As the owner of almost all the worlds rough diamonds, De Beers worked with diamond distributors to stifle supply and create a scarcity of diamonds. The result being higher prices and increased demand for these “rare” stones of great beauty. When Rhodes died in 1902, 90% of the worlds production and distribution of rough diamonds was owned by De Beers.
The control of the Diamond supply, creating artificially high prices and demand, continued throughout the twenty-first century. In addition to this, it was also De Beers who first suggested that a diamond is a true symbol of your love for another.
When diamond prices began to decrease in the 1930s, De Beers launched a marketing campaign which would change the way we looked at diamonds forever. The plan was to turn the diamond into a symbol of love, and after an extremely successful advertising campaign which included movie stars and other celebrities, De Beers managed to convince the world that the size of a diamond engagement ring was equal to how much a man loved his fiancé. The world bought it, and ever since diamond engagement rings have become a global norm and the price of diamonds has remained high.
So there you have it, diamonds are not that scarce. But thanks to De Beers, the supply of them is. And when you control supply, you can control demand. And most importantly; price.
Think like an Economist!
Q1: Using this article as an example, explain the relationship between price and supply.
Q2: Draw a diagram to show the affect of a large increase of the supply of diamonds on price and quantity supplied.
Q3: Draw a diagram to show how the market for diamonds has been manipulated. Explain how and why this is the case.
