Sunday, August 3, 2008

Scarcity & Allocation

Teacher enters a class of 10 students with 10 chocolates (product is not scarce).
Teacher: How many chocolates does each one of you want?
It is found that 8 students prefer to have one chocolate each; and 2 students desire to have 2 chocolates each.
Thus total demand is 12 chocolates, whereas total supply is 10 chocolates (we see that chocolates have become a scarce product now because of excess demand as defined by student preference)
Teacher thinks….. “I have to devise an allocation mechanism for distributing chocolates. Let the mechanism be based on the concept of willingness to buy and ability to pay.”
Teacher: Whoever is willing to get chocolates have to appear for an examination, and that they are free to quit if chocolates are not strongly desired.
With this announcement two students quit as they were not willing to sit for an examination. Subsequently we are left with 10 chocolates and 8 students.

Key Takeaways:
  • Individual preferences/desires make the availability of a product “limited in supply”
  • For allocation of scarce product there ought to be an allocation mechanism such that who ever is willing to pay the market price for the product gets it (in the above case price is “to appear for an examination”) or there will not exist any systematized and regulated process of product distribution
  • Allocation mechanism must be such that there is “continual adjustment of prices” (In the above case, if no one had left after “examination announcement” then the teacher would have to think for some add on strategies, i.e. some benchmarking in marks etc., till the point is achieved where total demand equals total supply)

Richa Shukla
Globsyn Business School

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