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In economics,
you're likely to hear the word "marginal" a lot:
marginal benefit,
marginal cost,
marginal revenue--
the list goes on and on.
So what is thinking on the margin,
and why is it important?
Marginal just means a little bit more
or a little bit less.
Let's imagine that you're watching a movie,
and you can't hear the dialogue.
You increase the volume just a little bit.
How high should you go?
Well, that's a question of comparing the marginal benefit
to the marginal cost of increasing the volume.
The first notch up sounds good.
Now you can hear what the actors are saying.
You increase it another notch.
Speakers are distorting a little, but you still prefer it.
One more notch.
Uh-oh!
Now there's an action scene.
It's too loud!
You don't want to wake up your roommates.
So you decrease it a notch.
You keep doing this,
making marginal adjustments up and down,
comparing the marginal benefit to the marginal cost,
each step of the way.
Thinking on the margin
just means comparing the benefit of the next decision to its cost.
Notice that thinking on the margin --
it's a method or way of arriving at an optimal or best decision.
If I asked you for the best volume to watch a movie,
you might have trouble answering.
But if you keep thinking and acting on the margin,
you'll come to a point
where the marginal benefits equal the marginal costs --
that's the optimum.
So thinking on the margin
is a way of searching for and finding an answer
to a problem that might otherwise be quite difficult.
Thinking on the margin
also tells you something else of importance:
what not to think about.
Let's imagine you run a small clothing shop,
and you think that the 1970s are about to have a renaissance.
I remember those times!
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So you load up on 100 pairs of bell-bottom jeans.
Let's say you paid $75 a pair.
You price the jeans at $100 --
a price that will cover your costs, including rent and wages.
But unfortunately, the jeans -- they just don't sell.
What do you do?
You think about lowering the price,
but your accountant tells you
that if you lower the price below $100,
you're guaranteed to take a loss.
(scream sound)
Fortunately, you had a good Economics class
in high school or college,
so you remember that what you paid for the jeans
is irrelevant.
That cost is sunk.
What matters now
is to compare the marginal benefits
and marginal costs of your options.
One option would be to put the jeans in storage and hope --
hope they'll come back in style.
Maybe you can get $100 per pair in the future,
but you get no money now,
plus you have to pay for storage.
Another option is to slash prices.
Sell them all now for $50 each.
That lets you clear out your inventory
and invest in something else.
You choose option two
and invest in the next big thing:
leg warmers!
Now, I know this sounds simple,
but actually, even experienced business people --
they often focus too much on what they paid for an item
and not enough on their best choices right now.
It's called the sunk cost or fixed cost fallacy.
In fact, I snuck an example of the fallacy right past you.
Did you catch it?
Earlier, I said you price the jeans at $100 --
a price that will cover your costs, including rent and wages.
But that's also wrong.
If bell-bottom jeans turn out to be in huge demand, for example,
then you should price them for more than $100.
What you paid for the jeans is irrelevant,
whether your decision was a bad one or a good one.
People fall prey to this kind of error all the time,
especially holding on to past mistakes.
Maybe you've been told, "Never give up!"
Well, take the advice of an economist.
Sometimes giving up is the smart thing to do.
Is the movie you're watching boring?
Well, buying the ticket was a bad decision.
But that cost is sunk.
Don't throw good time after bad.
Walk out!
No one likes to admit that they made a bad decision,
and so they stay in bad relationships,
bad businesses, and bad careers,
hoping, hoping to turn things around
and prove that their past decisions weren't so bad after all.
An economist says, "Ignore what you can't change.
Ignore the past. Focus on the future."
Let's summarize thinking on the margin.
First, think about a little bit more
or a little bit less,
and keep going until you arrive at a point
where the marginal benefits equal the marginal costs.
That's the optimum.
Second, when making a choice,
only think about the costs and benefits
that change with that choice.
Ignore sunk costs.
Thinking on the margin --
it's useful,
and not just for Economics classes.
But if you are teaching an Economics class,
check out our free unit plan that incorporates this video.
I promise, the marginal benefit will exceed the marginal cost.
And if you're ready to test yourself,
check out our practice questions.
Finally, if you're ready for more microeconomics,
click for the next video.
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