Question

Specify and explain the typical shapes of marginal-benefit and marginal-cost curves. How are these curves used to determine the optimal allocation of resources to a particular product? If current output is such that marginal cost exceeds marginal benefit, should more or fewer resources be allocated to this product? Explain.

Short answer

Marginal-benefit curves slope downward, and marginal-cost curves slope upward. Optimal allocation occurs where these curves intersect. If marginal cost exceeds marginal benefit, allocate fewer resources.

Step-by-step solution

Understanding Marginal-Benefit and Marginal-Cost Curves

The marginal-benefit curve typically slopes downward because the additional benefit received from consuming one more unit decreases as more of the product is consumed. Conversely, the marginal-cost curve usually slopes upward, reflecting that producing additional units often becomes more expensive due to factors like resource scarcity.

Using Curves for Optimal Resource Allocation

The optimal allocation of resources occurs where the marginal-benefit curve intersects the marginal-cost curve. At this intersection, the additional benefit of consuming one more unit equals the cost of producing it, representing the most efficient resource allocation.

Evaluating Current Output and Resource Allocation

When the marginal cost exceeds the marginal benefit, it indicates that the cost of producing an additional unit is greater than the benefit derived from it. This situation suggests that fewer resources should be allocated to the product.

Key concepts

Understanding Marginal Benefit

The concept of marginal benefit is essential in economics as it depicts the additional satisfaction or utility gained from consuming one more unit of a good or service. Typically, marginal benefit decreases with each additional unit consumed. This phenomenon is known as diminishing marginal utility.

For example, think about eating slices of pizza. The satisfaction from the first slice is usually high, but with each additional slice, the extra satisfaction or benefit gained tends to decrease. This is why the marginal benefit curve slopes downwards, reflecting the lower addition to total benefit gained from each successive unit.

• Decreasing satisfaction with increased consumption
• The cause for the downward-sloping curve

Understanding Marginal Cost

Marginal cost refers to the increase in total cost that arises from an extra unit of production. As production increases, the marginal cost usually rises. This occurs due to the principle of diminishing returns, where additional resources become less productive over time.

For instance, in a factory setting, adding more workers to a fixed amount of machinery eventually leads to congestion and inefficiencies, causing a rise in the marginal cost of production. Thus, the marginal cost curve usually slopes upwards.

• Increase in cost from producing additional units
• Related to resource limitations and inefficiencies

Resource Allocation for Optimal Production

Resource allocation determines how resources such as labor, capital, and materials are distributed in the production process. It seeks to ensure the efficient use of resources, aiming for maximum benefit with minimal cost.

The optimal point of resource allocation is where the marginal benefit equals the marginal cost. At this point, any additional units produced will not further improve efficiency or utility, as resources are being utilized in the most effective manner.

• Intersection of marginal benefit and cost curves
• Ensures no wastage of resources

Determining Optimal Output

Optimal output is the level of production where resources are most efficiently used to maximize benefit and minimize cost. This is achieved when the marginal cost is equal to the marginal benefit; no additional unit should be produced if the cost of doing so exceeds the benefit achieved.

If the current situation involves a marginal cost higher than marginal benefit, it signals overproduction, and fewer resources should be allocated to lessen production. Conversely, if the marginal benefit is greater, it suggests an opportunity to increase production until equilibrium is reached.

• Achieved when additional cost equals additional benefit
• Helps prevent overproduction or underproduction