Rational People Think at the Margin

Lacson, Reinier Ogsimer, Juk

Lobarbio, Raymon Santos, Elijah


Economists use the term marginal changes to describe small
incremental adjustments to an existing plan of action.

Keep in mind that margin means edge, so marginal changes are
adjustments around the edges of what you are doing.

In many situations, people make the best decisions by thinking at
the margin.
People make decisions by comparing the marginal benefit with the
marginal cost.

For every economic decision that you make, you need to look at the
marginal return for that decision.

A rational decision-maker takes action if and only if the marginal benefit
of the action exceeds the marginal cost.
1
st
Scenario
Imagine a working college
student studying in UST. He
works at McDonalds for his
own tuition fee. When
given too much work or
school related tasks,
instead of quitting his job
at McDonalds, he simply
cuts back a little on his
work hours. He did not
quit, but instead
Adjusted his schedule to
meet the current situation.
1
st
Scenario

Instead of quitting his job, he thought of ways to
adjust his time to manage both his job and his
academics.

Marginal Benefits:
Gets money for expenses
Gets job experience

Marginal Cost:
Stress
2
nd
Scenario
Think of a Broadway show at New York. They dont always get a
full house, sometimes, they face empty seats. So thinking at the
margin they decide to bargain with the public and sell them the
seats at half the price some hours before the show instead of
having empty seats in the show. Adjusting the tickets price
actually gains the theater more revenues because even if its
earning them 50% of the original cost, at least they earned
something.
2
nd
Scenario

Sold tickets for half the original price so people who
couldnt afford the tickets may watch.

Marginal Benefits:
People who couldnt afford before can buy.
Earned at least 50% of their target sales.

Marginal Cost:
Gets only 50% of their target sales.

Additional example:
Suppose that flying a 200-seat plane across the
country costs the airline Rs. 1,000,000, which
means that the average cost of each seat is Rs.
5000. Suppose that the plane is minutes from
departure and a passenger is willing to pay 3000
for a seat. Should the airline sell the seat for 3000?
In this case, the marginal cost of an additional
passenger is very small.
Why is water so cheap while diamonds are
expensive? Because water is plentiful, the
marginal benefit of an additional cup is small.
Because diamonds are rare, the marginal benefit
of an extra diamond is high.

Sources:
http://lawrencewatkins.com/think-on-the-
margin
http://www.gsm.pku.edu.cn/resource/upload
files/docs/20120710/2012071001124812481924.p
df