Marginal Analysis: Comparing Benefits and Costs
The economic perspective focuses largely on marginal analysiscomparisons of marginal benefits and marginal costs, usually for decision making. To economists, “marginal” means “extra,” “additional,” or “a change in.” Most choices or decisions involve changes in the existing state of affairs.
Should you attend school for another year? Should you study an extra hour for an exam? Should a business expand or reduce its output? Should government increase or decrease its funding for a missile defense system?
Each option involves marginal benefits and marginal costs. In making choices rationally, the decision maker must compare those two amounts. Example: You and your significant other are shopping for an engagement ring. Should you buy a 1/2 carat diamond or a 1-carat diamond? The marginal cost of the larger diamond is the added expense beyond the cost of the smaller diamond. The marginal benefit is the perceived lifetime pleasure (utility) from the larger stone. If the marginal benefit of the larger diamond exceeds its marginal cost (and you can afford it), buy the larger stone. But if the marginal cost is more than the marginal benefit, you should buy the smaller diamond instead even if you can afford the larger stone!
In a world of scarcity, the decision to obtain the marginal benefit associated with some specific option always includes the marginal cost of giving up something else. The money spent on the larger diamond means forgoing some other product. An opportunity costthe value of the next best thing given upis always present whenever a choice is made.
Directions
The purpose of this discussion board is to provide you with a forum to discuss your newly discovered economic concepts in light of current issues and real-world situations with others in the class. In essence, it is a practice ground for ensuring that your economic reasoning and foundation are secure.
This portion of the course requires you to interact with your fellow classmates. Please address these discussion questions below. Make sure to analyze the questions using an “economic perspective.” In other words, utilize economics vocabulary in each of your posts.
Questions
Cite two examples of recent decisions that you made in which you, at least implicitly, weighed marginal cost and marginal benefit.
What were the trade-offs and opportunity costs that you took into consideration when making your decision?
What was the outcome of each decision, and do you feel that you maximized your utility with that decision? Why or why not?
