When making a choice between two alternatives, individuals generally focus on the difference in the costs and benefits between alternatives. Economists describe this process as marginal decision making, or “thinking at the margin.” The last time you went to eat fast food, you probably faced a decision that highlights this type of thinking. Will you get the $1.50 cheeseburger and the $1.00 medium drink, or instead get the $3.00 value meal that has the cheeseburger and drink and also comes with a medium order of fries? Naturally, individual decision making focuses on the difference between the alternatives. The value meal costs 50 cents more (its marginal cost) but will give you one extra food item-the fries (its marginal benefit). Your marginal decision is whether it is worth the extra 50 cents to have the fries. If you pay attention, you’ll notice yourself frequently thinking at the margin. Next time you find yourself asking a salesclerk “How much more is this one?” when you are choosing between two items, you are doing a marginal analysis.
Marginal choices always involve the effects of net additions to or subtractions from current conditions. In fact, the word additional is often used as a substitute for marginal. For example, a business decision maker might ask, “What is the marginal cost of producing one more, or additional, unit?’ Marginal decisions may involve large or small changes. involves additional costs and additional benefits. Given the current situation, what marginal benefits (additional sales revenues, for example) can be expected from the new factory, and what will be the marginal cost of constructing it? What is the marginal benefit versus marginal cost of purchasing a new stapler? The answers to these questions will determine whether building the new factory or buying the new stapler is a good decision.
It is important to distinguish between average and marginal. A manufacturer’s average cost of producing automobiles (which would be the total cost of production divided by the total number of cars the manufacturer produces) may be $25,000, but the marginal cost of producing an additional automobile (or an additional 1,000 automobiles) might be much lower, say, $10,000 per car. Costs associated with research, testing, design, molds, heavy equipment, and similar factors of production must be incurred whether the manufacturer is going to produce 1,000 units, 10,000 units, or 100,000 units. Such costs will clearly contribute to the average cost of an automobile, but they will change very little as additional units are produced. Thus, the marginal cost of additional units may be substantially less than the average cost. Should production be expanded or reduced? That choice should be based on marginal costs, which indicate the change in total cost due to the decision.
Confusion between marginal and total benefits or costs can also be a source of error. Almost all of the choices we make are marginal, rather than all-or-nothing decisions. For example. we don’t make decisions between eating or wearing clothes-dining well in the nude versus starving in style. Instead, we choose between having a little more food at the cost of a little less clothing, or a little less of something else. So the relevant comparison is not betkween the total value of food and the total value of clothing but between their marginal values.
People commonly ignore the implications of marginal thinking in their comments, but seldom in their actions. Thus, the concept is far better at explaining how people act than what they say. Students are often overheard telling other students that they shouldn’t skjp class because they have paid to enroll in it. Of course, the tuition is not a factor relevant at I The “one more unit” could be a new factory or a new stapler. It is marginal because it in-the margin-it will be the same whether or not the student attends class on that particular day. The only real marginal considerations are what the student will miss that day (a quiz, information for the exam, etc.) versus what he or she could do with the extra time by skipping class. This explains why even students who tell others they paid too much for the class to skip it will ignore the tuition costs when they themselves decide to skip class. When we confront a decision, the marginal benefit and marginal cost associated with the choice will determine our decision. Marginal analysis will be used extensively throughout this course. As we develop this concept further, you should pay special attention to understanding how to use it properly.