2.7 The concept of the margin Flashcards
The role of markets
What is the marginal principle?
Economic agents make decisions by considering the effect of small changes from the existing situation
When would there be no incentive to change your decision?
If the marginal benefit = marginal cost
What’s the best outcome for a household/firm/society in a particular market?
When the marginal social benefit = marginal social cost
What is rational decision making?
A decision that allows an economic agent to maximise their objective, by setting marginal benefit = marginal cost
What would a rational economic agent do if marginal beneft > marginal cost and vice versa?
- They would proceed with a decision if MB > MC
- However, if MC > MB, they wouldn’t proceed
- And if MB = MC, there’d be no incentive to change decision
What are sunk costs?
A cost that has already been incurred and cannot be recovered; they must be ignored when making decisions on how much more to produce/consume
How to calculate the marginal cost?
change in quantity
What is marginal utility?
Any additional utility gained from consuming an extra unit of a good/service
What is the law of diminishing utility?
The more of a good you consume, the less additional pleasure you get.
More consumption = less utility
How does marginal utility and demand relate?
Marginal utility helps inform your willingness to pay for something as the higher your marginal utility, the higher price you’re willing to pay
What does the equimarginal principle state?
Consumers will choose a combination of goods to maximise their total utility. They’ll consider the marginal utility of goods AND the price
What does the marginal utility theory assume?
Consumers always act rationally
What are some limitations of the marginal utility theory?
- Consumers won’t work out the marginal utility/price: purchase out of habit/gut feeling
- Consumers aren’t always rational: may be influenced by advertising
- Difficulty of evaluating utility: don’t know exactly how much utility they’ll get
