Marginal utility and diminishing returns
Two important economic concepts that illustrate scarcity‘s impact on resource allocation choices are marginal utility and diminishing returns. Consuming one more unit of a good or service provides consumers additional satisfaction or benefits, 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.
By the way, subjective techniques such as surveys, focus groups, or individual interviews are employed to gauge utility, encompassing consumers’ gratification or delight from consuming goods and services. Within the framework of these assessments, participants actively assess and appraise their level of contentment, relying on predetermined criteria.
Scarcity and resource allocation
Both marginal utility and diminishing returns show how scarcity affects resource allocation choices. Regarding marginal utility, consumers must 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 choose how to allocate their limited resources among different production processes. They will allocate their resources to the production processes that provide the most additional output per input unit until the output gained from each additional input unit 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 spending $5 on coffee every morning before work. At first, buying this cup of coffee provides excellent value because it helps you wake up and prepares you for the day ahead. However, over time, the same $5 spent on another cup of coffee may not provide the same 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. However, 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, reducing responsiveness and diminishing marginal utility.
