Praxis Economics (5911)

Most economic decisions are not all-or-nothing. A business does not choose between producing zero or a million units; it decides whether to produce one more. Marginal means additional or incremental, and marginal analysis compares the extra benefit of an action with its extra cost.

Marginal benefit usually falls as an activity increases (the first hour of study helps more than the sixth), while marginal cost usually rises (each extra hour gives up something more valuable, such as sleep). The decision rule follows directly.

A coffee shop is deciding how many hours to stay open on Sunday afternoon. Each extra hour brings in less extra revenue as customers thin out, and each extra hour costs more because staff move into overtime.

Notice that total benefit keeps rising through the 5th hour (20 + 16 + 12 + 8 + 4 = $60). Maximizing total benefit would mean staying open 5 hours, but that ignores the rising cost. The marginal rule finds the best quantity without ever computing totals.

Decisions change when MB or MC changes. Suppose a local event raises the marginal benefit of each Sunday hour by $4, so MB becomes 24, 20, 16, 12, 8. Now the 4th hour has MB = 12 > MC = 10, while the 5th hour has MB = 8 < MC = 12. The best choice rises to 4 hours.

• An increase in MB (or a decrease in MC) leads to more of the activity.
• A decrease in MB (or an increase in MC) leads to less of the activity.
• A fixed cost that does not change with the decision (such as monthly rent) does not change MC, so it does not change the best quantity.

This is the logic behind incentives. A tax on an activity raises its marginal cost and discourages it; a subsidy lowers marginal cost and encourages it. The same reasoning reappears throughout the course: firms maximize profit where marginal revenue equals marginal cost, consumers buy until marginal utility per dollar is balanced, and society reaches efficiency where marginal social benefit equals marginal social cost.

A sunk cost has already been paid and cannot be recovered. Because it is the same no matter what you decide next, it should not affect a forward-looking choice. If you paid $15 for a concert ticket and feel sick, the $15 is gone whether you go or stay home; the only question is whether the marginal benefit of attending exceeds the marginal cost now.