Marginalism

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Marginalism

  1. 1. MARGINALISM<br />The concept of opportunity cost helps you decide whether to do something, such as whether to go to college or to a movie.  Lots of decisions, though, are not about whether to do something, but about how much to do something.  To deal with these kinds of decisions, economists use another powerful technique, called marginalism. <br />
  2. 2. example……..<br />Suppose that you're at a fast food restaurant and that you’re about to order some hamburgers.  Their price is $1 each.  Table 1 shows the total benefit and opportunity cost to you of buying and eating different quantities of these hamburgers.  The opportunity cost of each quantity is equal to the price of a hamburger ($1) times the number of hamburgers.<br />
  3. 3. What did you notice……?<br />            Notice what happens in the total benefit column as you buy more hamburgers.  The first one would give you a benefit of $2.50.  But you wouldn't be as hungry after eating that one, so consuming a second one would increase your total benefit by a smaller amount, $1.50.  A third hamburger would increase your benefit by even less, $.50.  And after three hamburgers, consuming a fourth would be so unappealing that it would actually reduce your total benefit by $.10.  <br />
  4. 4. TABLE 1<br />      <br />          Qty of       Total       Opportunity Marginal Price Marginal     Hamburgers  Benefit         Cost   Benefit Gain<br />      0             $   0           $   0           1st > > 2.50 1.0 1.50<br /> 1              2.50            1.00           2nd > > 1.50 1.0 .50<br /> 2             4.00            2.00           3rd > > .50 1.0 -.50<br /> 3             4.50           3.00          4th > > -.10 1.0 -1.10<br /> 4             4.40           4.00<br /> <br />
  5. 5. Marginal = additional<br />The new columns show the marginal benefit and price of consuming each of the four hamburgers. Economists use the word marginal to mean "extra" or "additional."  The marginal benefit of each hamburger is simply the additional benefit you would get if you consumed it.  The opportunity cost of consuming each additional hamburger is given by its price.<br />
  6. 6. How much should you buy ?<br /> How many hamburgers should you buy?  Clearly, you should buy at least one.  The marginal benefit of the first hamburger is $2.50, but its price is only $1.00.  By consuming it, you can make yourself better off by $1.50.  This $1.50 is your marginal gain, the amount you gain from increasing what you're doing by one unit.  Here's how to calculate the marginal gain you get from consuming more of something:<br /> <br />
  7. 7. Marginal Gain<br />The marginal gain from consuming one more unit of something is equal to the difference between its marginal benefit and price.<br />You should also buy a second hamburger, since doing so will give you a marginal gain of $.50.  But you shouldn’t buy a third one. Since its price exceeds its marginal benefit, consuming a third hamburger would make you worse off by $.50.  Nor should you buy a fourth hamburger -- doing so would make you worse off by $1.10.  <br />
  8. 8. Marginal gain tells…..<br />Remember that the marginal gain tells you how much better off you'll be if you consume one more unit of a good or service.  As long as it's positive -- that is, as long as marginal benefit exceeds price -- consuming an additional unit of something will make you better off.  Only when the marginal gain becomes negative -- when marginal benefit falls below price -- will further consumption make you worse off.  This suggests the following rule for deciding how much to do anything:  <br />            Continue doing something as long as the marginal gain is positive.  <br />

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