Lesson preview · Marginal Analysis
Marginal Benefit vs Marginal Cost
~5 min · Free to read
Rational decision-making boils down to one simple rule: keep doing something as long as the benefit of one more unit is greater than the cost of that one more unit. This is how economists think about EVERY decision — eating, studying, hiring workers, even going to war. Keep going until . Then stop.
Key Term
Marginal Benefit ($MB$)
The extra benefit (in utility, dollars, or whatever unit) you get from doing ONE more unit of something.
Key Term
Marginal Cost ($MC$)
The extra cost (including opportunity cost) you incur from doing ONE more unit of something.
Tip
The optimal decision rule
Keep going while . Stop when . Never continue when . This single rule governs almost every optimization problem in economics.
Marginal benefit and marginal cost are the change in total benefit or cost from one more unit.
The sweet spot: produce/consume up to the point where marginal benefit equals marginal cost.
The power of this rule is that it doesn’t need you to calculate totals. You only have to compare the next step. ‘Should I study one more hour?’ If the hour is worth more than it costs (sleep, stress), yes. If not, stop. That’s marginal analysis in action.
Check yourself · no marks
A farmer’s 10th hour of labor adds 20 bushels to his harvest but makes him exhausted (worth -25 bushels in pain). Should he work the 10th hour?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Worked Example
A coffee shop is deciding how many baristas to hire. Each extra barista lets them serve more customers, but adds wage costs. Data:
• Barista 1: adds 300 dollars in revenue, costs 100 dollars in wages • Barista 2: adds 250 dollars in revenue, costs 100 dollars in wages • Barista 3: adds 150 dollars in revenue, costs 100 dollars in wages • Barista 4: adds 80 dollars in revenue, costs 100 dollars in wages
How many baristas should the shop hire?
Practice · 1 / 4
According to the optimal decision rule, you should keep doing an activity as long as:
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