The Concept of the Margin

Question 1

What is the concept of the margin?

Answer 1

Thinking about the effect of an additional action - e.g. marginal cost.

Question 2

Why is thinking at the margin important?

Answer 2

It makes economic agents think ahead about actions they will take now/ in the future rather than the decisions they’ve made in the past - this then increases productivity and maximises utility.

Question 3

What is marginal utility?

Answer 3

The extra satisfaction gained by consuming an extra unit of that good.

Question 4

What does diminishing marginal utility explain?

Answer 4

It explains why the Demand curve is downward sloping.
The theory suggests consumer surplus generally declines as extra units are consumed as the unit provides less utility than those already consumed - consumers are then willing to pay less for additional units.

Question 5

What leads to a misallocation of resources?

Answer 5

When there is insufficient incentive to produce the optimal supply.

Question 6

What is the main incentive in a market economy?

Answer 6

price - act as a signal for buyers and sellers.

Question 7

Intuition vs rationality

Answer 7

intuition - basing decisions on feelings or instincts

rationality - basing decisions on facts

Question 8

Steps for rational decision making (8)

Answer 8

1. identify the problem
2. find and identify the decision criteria
3. weigh the criteria
4. generate alternatives
5. evaluate alternatives
6. choose the best alternative
7. carry out the decision
8. evaluate the decision

Question 9

What is the law of diminishing returns?

Answer 9

only changing 1 factor of production and fixing inputs of the others will eventually lead to diminishing marginal returns from the variable factor.