Marginal Change

What is Marginal Change?

Economists use the term marginal change to describe small incremental adjustments to an existing plan of action.

In simple words, Marginal changes are very small incremental changes which don’t affect the larger (macroeconomics) totals except in aggregate. 

Keep in mind that โ€œmarginโ€ means โ€œedge,โ€ so marginal changes are adjustments around the edges of what you are doing.

In many situations, people make the best decisions by thinking at the margin.

Suppose, for Example

You asked a friend for advice about how many years to stay in school.

If he were to compare for you the lifestyle of a person with a Ph.D. to that of a grade school dropout, you might complain that this comparison is not helpful for your decision.

You have some education already and most likely are deciding whether to spend an extra year or two in school.

To make this decision, you need to know the additional benefits that an extra year in school would offer (higher wages throughout life and the sheer joy of learning). And, the additional costs that you would incur (tuition and the forgone wages while youโ€™re in school).

By comparing these marginal benefits and marginal costs, you can evaluate whether the extra year is worthwhile.

Another Marginal Change example,

Consider an airline deciding how much to charge passengers who fly standby.

Suppose that flying a 200-seat plane across the country costs the airline $100,000.

In this case, the average cost of each seat is $100,000/200, which is $500. One might be tempted to conclude that the airline should never sell a ticket for less than $500.

In fact, however, the airline can raise its profits by thinking at the margin.

Imagine that a plane is about to take off with ten empty seats, and a standby passenger is waiting at the gate willing to pay $300 for a seat. Should the airline sell it to him?

Of course, it should. If the plane has empty seats, the cost of adding one more passenger is minuscule.

Although the average cost of flying a passenger is $500, the marginal cost is merely the cost of the bag of peanuts and can of soda that the extra passenger will consume.

As long as the standby passenger pays more than the marginal cost, selling him a ticket is profitable.

As these examples show, individuals and firms can make better decisions by thinking at the margin. A rational decisionmaker takes an action if and only if the marginal benefit of the action exceeds the marginal cost.

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