Demand: Utility and Marginality

Demand: Utility and Marginality

Introduction

Scarcity of resources, micro and macro-economics form the basis of the economic study, hence, the need to choose from the available preferences. Preferences are made based on utility, which is the ability of a commodity to satisfy a human want/need. A commodity must be a human want, have utility and have control over utility for it to be referred to as an economic good. Scarcity exists because the needs of humans always exceed the available satisfiers of the same needs. Macro-economics describes the satisfaction trend of these needs with reference to available output for nations whereas micro-economics focuses on person and organizations. The study of scarcity has brought up the concept of diamond-water paradox.

The concept of market forces explains that the price/value of a commodity is determined by the demand and supply forces. Commodities with higher demand and lower supply are scarce, therefore, they are considered to be of much higher value than those more available. This clearly explains the diamond water paradox. Although water is an essential commodity for human consumption, it is readily available and affordable for consumption. Diamond on the other hand is scarce and not readily available. This makes it more valuable than water. With reference to McLaughlin, (2007), “When some item is widely available in abundance, such as water in most inhabited areas, the next unit acquired will be relatively inexpensive, the value applied to it by users will be low” Air happens to be the most fundamental need for survival. It is however valueless in monetary terms since it is readily available. The degree of abundance of a commodity determines its value monetarily.

An illustration of the diamond-water paradox is the comparison of the average earnings of a professional athlete compared to most trained people in the labor force (Chass, 2002). Athletes use their talent to earn their income. This is the profession where a person not in possession of the talent cannot work. On the other hand, training and education are the basis of white-collar careers where anyone appropriately trained can deliver. Here, the total utility of the trainees will be high and the marginal utility low. This happens since the number of people gaining knowledge in various fields is constantly increasing. The value of their services is therefore constantly decreasing.

The diminishing marginal utility law explains the decrement in marginal utility of a commodity because of increased productivity or availability. This shows that the more the availability of a product or service increases, its ability to satisfy a human want diminishes. If readily available, probably in excess, the total value will increase as the marginal value decreases. Where the services are rare, the demand will be high leading to a higher value of the same. Consequently, the salary accrued to the services will be high to ensure maintenance. This clarifies the concept that employees’ wages are a reflection of the importance of their services to an organization. A rare quality will be paid more due to its irreplaceable nature. This is contrary to the common qualities, which can be easily replaceable by the company hence their worth is lower.

Over the years, the value of teachers’ services has been declining. This has been attributed to the fact that the services of a teacher are common and serve a smaller number of people at a time. This is also because the youth do not attach much importance to education any more. On the other hand, earnings of professional athletes have been consistently on the rise. Chass, (2002) stated that, “When people start paying to watch teachers teach… their salaries will get closer to what players make.” For professional athletes, meeting the required standards for the high salaries is much more tasking than normal employees are. The small number of qualified athletes has led to high marginal utility, thus an increase in value. The number of people who receive entertainment from athletes at one time is also far much more than that of teachers.

When the wages accrued to one employee in a firm are higher than the marginal revenue product, which is the amount of revenue increase upon employment of one more unit of labor, the firm can no longer hire more employees. This is because further recruitment of workers will have them operate at losses. The value attached to any commodity in the market depends entirely on its marginal utility, which is the extent to which it can be accessed. When the marginal utility of a product reduces to the level of marginal revenue product, the firm maintains its operations at equilibrium to avoid making losses.

Ticket sales to athletic events have been on the increase regardless of the high prices. This is however attributed to the value attached to athletics today. Athletes’ salaries are not the reason why the ticket prices for a particular athletic event are high. While athletes can entertain a large crowd at the same time, the exact form of entertainment cannot be acquired at any other place. For instance, a world cup game in a particular place with specific teams cannot be repeated.

Conclusion

Micro and macro-economic studies have proven that the availability of a commodity determines its monetary value. Diamonds are not recognized as a basic human need/want. However, studies have shown that it is a very rare commodity, thus high value attached to it. Available commodities such as water and air have little or no monetary value attached to them. Marginal utility also determines the value of a product. Commodities with higher marginal utility have a higher value as opposed to those of lower marginal utility.

References:

Chass, M. (2002). Scoring the Big Money. New York Times. Retrieved on May 17, 2010 from: http://findarticles.com/p/articles/mi_m0BUE/is_1_135/ai_n18614876/

Lesson 3: The Economics of Pro Athlete Salaries and Ticket Prices (2005). Center for Economic Education. University of Wisconsin-Parkside. Retrieved on May 17, 2010 from: http://www.uwp.edu/departments/economics/cee/teaching_resources/lesson03.html

McLaughlin, D (2007). Rich Athletes, Poor Teachers. Ludwig Von Mises Institute. Retrieved on May 17, 2010 from: http://mises.org/story/2626