Economics & Essential Skills

 

 

 

 

 

 

 

back to the
WH & Essential Skills
home page

 

Current Events

Course Objectives and Syllabus

 

                                                                          Homework: Read Chapters 3 & 4 in Book One

Class 003

Thinking like an economist: Marginal Analysis
What does it mean to think at the margin? It means to think about your next step forward. The word "marginal" means "additional." The first glass of lemonade on a hot day quenches your thirst, but the next glass, maybe not so much. If you think at the margin, you are thinking about what the next or additional action means for you. Economists use Decision Trees to oft times make decisions. Here's a decision tree I use in making a critical decision:



Let's get back to Marginal Analysis sans Decision Trees. Economists often use graphs to aid in the decision making process. Take a moment and  develop a graph of the following scenario:

 

You're a gardener. You grow tomatoes. How many additional tomatoes can you get by taking better care of your garden? If an hour extra work weeding means you will get 12 more tomatoes, then one additional hour of work results in 12 additional tomatoes. Economists sometimes summarize that by saying your marginal product of labor is 12. That just means you can get 12 more tomatoes for one additional hour of work.

On the flip side of that, you could equally well say that the marginal cost of a producing one additional tomato is 5 additional minutes (1/12th of an hour) of your labor. Every new tomato costs you another five minutes of weeding. As another example, if one additional Facebook friend costs you an additional 10 minutes of attention, then the marginal cost is 10 minutes of your time per new Facebook friend.

A bus that is half-empty can take on more riders with zero or very little extra cost--perhaps just a few cents more for wear and tear and the cost of gas to haul an extra 150 pounds. Economists would say the marginal cost of an additional rider is nearly zero. But, if buses are always running packed with lines left standing, then the marginal cost of additional riders would be the entire cost of adding another bus. It is very common to have to compare different marginal costs for different scenarios in order to decide which alternative to pursue. Economists are always asking, "What if..."

When you drive around the block to park your car for a concert or event, you can keep driving around the block waiting for that perfect, free, on-street parking spot to come available. Or, you can weigh the alternative of spending $10 for a paid parking lot spot. What matters is what you do in the next minute, ten minutes, hour, or day. The marginal cost of finding a parking space could be only $10; or it could be another hour of driving around hoping for a free spot to open up just as you are in position to grab it. If you already spent an hour searching for a great parking spot, you may well do better to let that memory go. Thinking at the margin means to let the past go and to think forward to the next hour, day, year, or dollar that you expend in time or money. What's better for you now or in the next few minutes? If you think at the margin, you are thinking ahead. At some point, if you continue to drive around the block again and again with no results, an economist would encourage you to think about the future instead of bulleting on the past. You can't change the past, but you can change what you do next. (Economists sometimes summarize this by saying, "Sunk costs are sunk.") And in what you do next, you should weigh the costs and benefits starting afresh for the next few minutes of your time--which is what economists mean when they say, "Think at the margin." At the margin, you could get a parking spot for $10 or you could drive around and maybe get a parking spot for free with a probability of, say, 20% in the next hour. Thinking at the margin means weighing those future options, and not focusing on what you did in the previous hour of frustrating circling around.

 

There is one thing to be aware of:

The term "marginal cost" is not the same as opportunity cost. Opportunity cost is from the perspective of a buyer, while marginal cost is from the perspective of a seller or producer. That is, opportunity cost refers to what you have to sacrifice--at the margin--as a buyer because when you buy one thing you can't buy something else. Marginal cost refers to what a seller or producer has to sacrifice in order to sell or produce one more item.

 

Success comes in cans, failure in can'ts.
- Author Unknown

 

 

Opportunity is always knocking. The problem is that most people have the self-doubt station in their head turned up way too loud to hear it.
- Brian Vaszily

 

 

Opportunity dances with those who are already on the dance floor.
- Jackson Brown

 

 

 

People often say that motivation doesn't last. Well, neither does bathing - that's why we recommend it daily.
- Zig Ziglar

 

 

 

Life is not about how fast you run, or how high you climb, but how well you bounce.
- Unknown

 

 

 

 

 

"How To" Decision Trees
http://www.mindtools.com/dectree.html