Lesson preview · Marginal Analysis
Applying Marginal Analysis
~5 min · Free to read
Marginal analysis is one of those ideas that, once you see it, shows up everywhere. How long should you study? Until the benefit of one more hour drops below the cost. How many slices of pizza? Until the next slice isn’t worth it. How many workers should a factory hire? Until the next worker costs more than they add. Same rule, infinite applications.
Trap · Warning
Watch out for sunk costs
Marginal analysis looks only FORWARD. Money already spent (sunk costs) doesn’t matter. ‘I paid 20 dollars for this movie ticket so I have to stay’ is a classic sunk-cost trap. Ask: from right now, is the next minute worth it?
Pro tip: when someone asks ‘should I do X?’ replace it with ‘should I do ONE MORE unit of X?’ The first question is usually unanswerable. The second is always clean. This is the shift in thinking that separates economic reasoning from everyday reasoning.
Check yourself · no marks
A manager at a hamburger restaurant calculates that, on average, each worker brings in 20 dollars/hour in revenue and costs 16 dollars/hour (after overtime). She decides to stay open late because ‘average revenue exceeds average cost.’ What’s wrong with her reasoning?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Worked Example
Priya has an exam tomorrow. Each hour of studying adds points to her expected grade, but costs sleep. Her table:
• Hour 1: +10 points, costs 2 points in lost sleep • Hour 2: +8 points, costs 3 points • Hour 3: +6 points, costs 4 points • Hour 4: +4 points, costs 5 points • Hour 5: +2 points, costs 7 points
How many hours should she study?
Practice · 1 / 4
Priya’s study hours: Hour 1 adds 10 points (costs 2), Hour 2 adds 8 (costs 3), Hour 3 adds 6 (costs 4), Hour 4 adds 4 (costs 5), Hour 5 adds 2 (costs 7). How many hours should she study (where net marginal benefit is still positive)?
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