Marginal analysis, Economics


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By Shahi Raz. University Of Peshawar.

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Marginal analysis, Economics

  1. 1. Wednesday, November 23, 2011 Marginal Analysis Thinking at the MarginFrom an economists perspective, making choices The hourly wage represents what I earn forinvolves making decisions at the margin - that is, working an extra hour - it is the marginal gain ormaking decisions based on small changes in the marginal benefit.resources: How should I spend the next hour? The value of time is essentially an opportunity cost - it is how much I value having that hour off. How should I spend the next dollar? In this example it represents a marginal cost -On the surface, this seems like a strange way of what it costs me by working an additional hour.considering the choices made by people and firms. The increase in marginal costs is a commonIt is rare that someone would consciously ask phenomenon; I do not mind working a few hoursthemselves - How will I spend dollar number since there are 24 hours in a day. I still have24,387?, How will I spend dollar number24,388?. Treating the problem in this matter does plenty of time to do other things. However, as Ihave some distinct advantages: start to work more hours it reduces the number of hours I have for other activities. I have to start Doing so leads to the optimal decisions giving up more and more valuable opportunities to being made, subject to preferences, work those extra hours. resources and informational constraints. It makes the problem less messy from an analytic point of view, as we are not trying It is clear that I should work the first hour, as I to analyze a million decisions at once. gain $10 in marginal benefits and lose only $2 in marginal costs, for a net gain of $8. While this does not exactly mimic conscious decision making processes, it does provide results similar to the decisions people By the same logic I should work the second and actually make. That is, people may not think third hours as well. I will want to work until using this method, but the decisions they make are as if they do. which time the marginal cost exceeds the marginal benefit. I will want to work the 10th hour as IMarginal Analysis - An Example receive a net benefit of #3 (marginal benefit of $15, marginal cost of $12). However, I will notConsider the decision on how many hours to want to work the 11th hour, as the marginal costwork, as given by the following chart: ($18) exceeds the marginal benefit ($15) by threeHour Hourly Wage Value of Time dollars.Hour 1 $10 $2Hour 2 $10 $2 Thus marginal analysis suggests that rationalHour 3 $10 $3 maximizing behavior is to work for 10 hours.Hour 4 $10 $3Hour 5 $10 $4Hour 6 $10 $5Hour 7 $10 $6Hour 8 $10 $8Hour 9 $15 $9Hour 10 $15 $12Hour 11 $15 $18Hour 12 $15 $20