Two important concepts in economics that illustrate the impact of scarcity on resource allocation choices are marginal utility and diminishing returns. That being said, consuming one more unit of a good or service provides consumers with additional satisfaction or benefits, which is known as marginal utility. However, the law of diminishing marginal utility states that as consumers consume more units of a good or service, the additional satisfaction or benefit derived from each additional unit decreases.
BTW, in order to gauge utility, which encompasses the gratification or delight that consumers obtain from the consumption of goods and services, subjective techniques such as surveys, focus groups, or individual interviews are employed. Within the framework of these assessments, participants actively assess and appraise their level of contentment, relying on predetermined criteria.
Scarcity and resource allocation
Yep, both marginal utility and diminishing returns show how scarcity affects resource allocation choices. When it comes to marginal utility, consumers have to decide how to distribute their limited income among various goods and services. Often they pick the goods and services that give them the most value for each dollar spent until the value they get from spending an extra dollar on each item is the same.
In the case of diminishing returns, firms are forced to make choices about how to allocate their limited resources among different production processes. They will choose to allocate their resources to the production processes that provide the most additional output per unit of input until the additional output gained from each additional unit of input is equal.
Some real-world examples of marginal utility and diminishing returns
Numerous tangible illustrations of marginal utility and diminishing returns permeate our quotidian existence. For instance, contemplate the exquisite sensation that engulfs your palate upon indulging in the initial morsel of your cherished culinary delight. However, as contentment gradually saturates your senses, subsequent mouthfuls evoke diminished gratification.
Secondly, imagine that you spend $5 on a cup of coffee every morning before work. At first, buying this cup of coffee provides great value because it helps you wake up and gets you going for the day ahead. However, over time, the same $5 spent on another cup of coffee may not provide the same level of benefit as the previous one. In other words, the marginal utility of that second cup of coffee is lower than the initial purchase because it doesn’t have the same impact on your day.
Thirdly, most multinational companies (MNCs) allocate substantial resources to advertising and marketing campaigns to promote their products and attract customers. Initially, the investment yields significant returns, as consumer awareness and sales rise. But as the advertising budget increases beyond a certain threshold, the impact of each additional dollar spent diminishes. The target audience may become saturated with advertisements, leading to reduced responsiveness and diminishing marginal utility.