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- In thinking economically, “marginal” describes the additional cost (or the additional benefit) of a given behavior.
• The question economic thinkers ask is, “Do my marginal benefits exceed my marginal costs?” Other folks might ask “Does doing one more thing really make me better off?” These are really the same question.
• Inherent in these questions is the notion of MAXIMIZING BENEFIT and MINIMIZING COST.
• We tend to “hang on” to questionable decisions made in the past because we want to get value out of time, effort, or dollars dedicated to some prior activity. We say, “I can’t sell my house, sell a stock, quit working toward a degree in art history, stop studying for a test, fire Smith, or change occupations because of all my time, dollars, or energy that I’ve already put in.” Your time, dollars, and energy are sunk costs and are gone.
• Sound economic thinking happens when we focus on THE FUTURE. You cannot undo past decisions, you can only make choices about the next decision that lies ahead.
• Putting additional time or resources into something only makes sense if the marginal benefit exceeds the marginal cost. For example, studying for a test and sleeping are both good things for us to do. Unfortunately, you can’t sleep and study for a test simultaneously. You must make an economic choice about when studying is no longer productive and sleep would be more a beneficial choice to you.
- The graph below throws a lot of students for a loop, but it shows how the most profitable point of production for a firm is to produce where marginal revenue is equal to marginal cost, and then to charge the price at that output on the demand curve. For individuals to be better off, operating where marginal benefit and marginal cost are equal is the most economical and rational decision.
15 Minute lessons that can help illustrate this concept:
A Chair for My Mother
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