Scarcity: Economics and Marginal Benefit

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sMarginal Benefit / Cost and Scarcity Paper
Uploaded by 989 on Aug 1, 2005

Marginal Benefit / Cost and Scarcity Paper

Define the concept of scarcity: Scarcity: The goods available are too few to satisfy individuals' desires. Scarcity is a central concept in economics. Resources are scarce if any individual would prefer to have more of that good or service than they already have. Most goods and services are scarce - those that are not are known as free goods. Where goods are scarce it is necessary for society to make choices as to how they are allocated and used. Economists study (among other things) how societies perform the optimal allocation of these resources. For example, we may all want to own gold jewelry. However, the amount of gold available is limited, so it is necessary to make choices as to how it is allocated. In a market economy, this is achieved by trade. Individuals trade resources between themselves to reallocate resources to where they are most wanted. In a smoothly operating market system, the rate of exchange between different resources or price will adjust so that demand is equal to supply. One of the roles of the economist is to discover the relationship between demand and supply and develop mechanisms (such as pricing, incentives, or penalties) to achieve an optimal outcome (in terms of consumer welfare) between supply and demand. "Substantives" economists and economic anthropologists have argued that "scarcity" is a social construct and not a universal. Certain intangible goods are likely to remain scarce by definition or by design; examples include awards generated by honors systems, fame, and membership of elites. These things are said to have scarcity value; that is to say, all or most of their value is derived from their scarcity.

Define the concepts of marginal benefit / marginal cost. What is the relationship between marginal benefit / cost and scarcity? Marginal benefit is the benefit a person receives from consuming one more unit of a good or service. It is measured as the maximum amount that a person is willing to pay for one more unit of the good or service. Examples: Suppose that you see three movies a week. The maximum amount that you are willing to pay to see the first movie is $10, to see the second movie is $8, and to see the third movie is $6. The marginal benefit of the first movie is $10, of the second movie is $8, and of the third movie is $6.

Marginal Cost: Marginal cost is the opportunity cost of producing one more unit of a good or service. It is the best alternative forgone. It is calculated as the increase in total cost divided by the increase in output. An example of this would be when Henry produces his third table in a week he gives up producing two book shelves. The marginal cost of the third table is two book shelves.

The relationship between marginal benefit, marginal cost and scarcity can be perceived as making decisions that provide the greatest possible return from the resources available, people and organizations must weigh the benefits and costs of using their resources to do a little more of some things and a little less of others. For example, to use their time effectively, students must weigh the additional benefits and costs of spending another hour studying economics rather than listening to music or talking with friends. School officials must decide whether to use some school funds to buy more books for the library, more helmets for the football team, or more equipment for teachers to use in their classrooms. Company managers and directors must choose which products to make and whether to increase or decrease the amount they produce. The President, Congress, and other government officials must decide which public spending programs to increase and which ones to decrease. Focusing on changes in benefits and comparing them to changes in costs is a way of...
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