[RPG] Can diamond dust be substituted for diamonds for material components

It is worth 100gp. Don't overthink it.

Although in reality taking a valuable diamond and turning it into powder would likely reduce its total value, D&D/Pathfinder does not model prices of luxury items in that much detail. Instead the spell component cost is supposed to be a mechanical transaction that limits number of castings of a spell. You input 100gp of funds (plus in the narrative it is reasonable to obtain the precise component you need), you can cast the spell.

As an aside: Would a craftsman be able to turn 100gp diamond into more than 100gp of diamond dust? No, the starting material and end material have to make sense in order for the craftsman's work to have added value as per the rules.

The Pathfinder craft rules are at best guidelines to enable characters to attempt to fix and make things. They are left open-ended about what is allowed or not, and include DM assessments of item complexity for instance. I would personally say that creating diamond dust from a diamond is not at all complex, nothing relevant to any Craft is being "made" and therefore it does not require a Craft check. The idea that it might take many weeks of effort for a skilled jeweller to turn a diamond into dust seems very wrong too.

If completely arbitrary transformations were allowed to gain value in combination with Craft and/or Fabricate, you could start with e.g. 10gp worth of raw gold, convert that into powder, convert the powder into jewellery, convert that back into something else (maybe just powder again, after all melting and forming gold is typical real-world crafting process) etc, until you have 10,000gp or more in funds.

Spell components allow the player characters to be given an ability at a certain level while restricting how frequently or how readily they can use it.

Placing raise dead at 5th level spell essentially means that 9th level characters unlock the ability to return to life if slain. You don't want to allow low-level characters that ability, or it cheapens death, and the game relies on that to build tension; but you don't want players who have invested much time in their high level characters to be so afraid of being killed that they never take risks.

But you still want there to be some reason why players can't just raise dead freely, so that there's still a drawback to being killed. You have to fear your character dying or there's no tension, no risk, and less excitement as a result. There must be a cost to raising the dead to stop you using it repeatedly.

There are just some spells that you want the players to have access to, but not use too frequently. Divination, for example, your players will use repeatedly if they can. They will make heavier use of area-defence spells like arcane lock, glyph of warding, hallow, and magic circle. They will eat a heroes' feast every day and identify every item they find with legend lore.

D&D 5th edition's non-consumed material components, what D&D 3.5 used to term a focus, have a different mechanical effect. It allows the game to keep certain spells at or near their traditional level, but deny them to characters who are new to that level. Identify, for example, is still a 1st level spell but its 100 gp non-consumed component makes it unavailable to starting characters.

The 50 gp component of chromatic orb discourages new players from taking this spell and encourages more traditional spells like magic missile; upon reaching level 2, most characters will have acquired enough money to buy the gemstone required for this spell, and they can take the new spell then. (The game may do this to avoid confusing new players with attack roll and element choice, or to artificially protect traditional newbie spells like magic missile which ordinarily do less damage but hit more reliably; missing with one of two high-level spells per day is frustrating to new players who may be familiar with videogame RPGs which typically allow many spells with a relatively fast recharge.)

Since treasure tends to scale with level, in many cases components have the effect of giving high-level characters something to use in lower-level slots. When you're very high level, you really can eat heroes' feast every day, but without consuming a more high level spell slot. Lower-level characters can only afford to use it on some days, so components can effectively create a type of spell that can only practically be cast less often than daily, which is something you otherwise can't do within the spell slot system.

Material components also give the players a goal, and make for some interesting choices. The wizard wants to find a pearl worth 100 gp for his identify spell, and will gladly give up his share of the gold to keep such a pearl. The party may be forced to sacrifice a very valuable 5,000 gp diamond because it's the only one they have worth at least 1,000 gp and required for an important spell.

There's also the effect you mentioned that material components allow the DM to hand out the unique component for a given spell (e.g. to manually limit the number of uses of raise dead per adventure). However, I don't believe that this is the primary reason for spell components.

Many of the components are shared between different spells, and are relatively well-known and easily-purchased (with the right amount of money), such as diamonds. Most groups I've gamed with simply hand-wave the exact components as long as you expend the right amount of gold. The DM can use it as a way to manually limit uses of certain spells in an in-game way, but in my experience it's a way to make certain actions more expensive.

If you remove expensive spell components, players will use those spells more readily. They're still limited by the number of spell slots they have per day, so it's not actually entirely broken. The main concern is abilities which can be used out-of-combat. You could make an everburning torch for free each day in your downtime. You could cast divination every day at no cost. Your players never have to think, "Do I spend the money to legend lore here?", but will fully identify the lore of each and every item in downtime.

These aren't necessarily bad things. The video game Dark Souls tells huge amounts of its story through item descriptions. You can use divination to give players hints they missed or forewarn them of danger. Your players may enjoy cheap access to raise dead, and you might enjoy a higher likelihood that PCs will survive to follow the character plots you've got planned.

Simply be aware of the spells that are intended to be of limited use, and think carefully about how frequent use will change your game, and how it may change your game world if this type of magic is more readily available to NPCs.