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Understanding why the paradox exists can be helped by understanding the economic terms known as marginal utility and scarcity.
Scarcity can be simply defined as how readily available a good, skill, or service is. Is there a lot of it compared to what people are demanding? Marginal utility is the additional satisfaction or gain someone gets from using or purchasing an additional unit of a particular good or service. People are willing to pay a higher price for goods with greater marginal utility. Utility is the economist's way of measuring pleasure or happiness and how it relates to the decisions that people make. Utility measures the benefits (or drawbacks) from consuming a good or service or from working. Although utility is not directly measurable, it can be inferred from the decisions that people make. Calculating Marginal Utility: Suppose you have the following utility function: U(b, h) = 3b * 7h where: b = number of baseball cards h = number of hockey cards And you're asked "Suppose you have 3 baseball cards and 2 hockey cards. What is the marginal utility of adding a 3rd hockey card?" First step is to calculate the marginal utility of each scenario: U(b, h) = 3b * 7h U(3, 2) = 3*3 * 7*2 = 126 U(3, 3) = 3*3 * 7*3 = 189 The marginal utility is simply the difference between the two: U(3,3) - U(3, 2) = 189 - 126 = 63. Price leadership is more widespread than cartels, because it allows the members complete freedom regarding their product and selling activities and thus is more acceptable to the followers than a complete cartel, which requires the surrendering of all freedom of action to the central agency. If the product is homogeneous and the firms are highly concentrated in a location the price will be identical. However, if the product is differentiated prices will differ, but the direction of their change will be the same, while the same price differentials will broadly be kept. |
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