Principles of Economics – Marginal Analysis

Flashcards cover the lecture’s key ideas—definitions of marginal cost and benefit, the decision rule MB>MC, diminishing marginal utility, and applied examples involving cookies, savings deposits, and a bus-ticket pricing decision.

What core principle describes how rational people make decisions in economics?

They think at the margin, comparing small (marginal) benefits with marginal costs before acting.

What is a "marginal change"?

A small, incremental adjustment to an existing plan of action.

According to marginal analysis, when is it rational to take an action?

When the marginal benefit (MB) exceeds the marginal cost (MC).

What is the marginal cost (MC)?

The additional cost incurred from choosing one extra unit of an activity (e.g., the price of the next cookie Rashna buys).

What is the marginal benefit (or marginal utility, MB)?

The extra satisfaction or benefit gained from consuming one additional unit of a good or service.

State the simple decision rule that guides marginal decision-making.

If MB > MC, do it; if MC > MB, don’t do it.

Define "diminishing marginal utility."

As consumption of a good rises, the satisfaction derived from each additional unit eventually declines.

If the marginal benefit of Rashna’s 7th cookie is $2 and the marginal cost is $3.50, should she buy it? Why or why not?

No, because MB ($2) is less than MC ($3.50); buying would reduce her overall satisfaction.

Your savings account balance rises from $480 to $630 on 03 September. What is the marginal change?

An incremental deposit (marginal change) of $150.

On 29 September your account shows a new deposit of $100, raising the balance from $630 to $730. What is the marginal change and new total?

Marginal change = +$100; new total deposit = $730.

In the travel-agency bus example, what is the marginal cost of selling one more seat five minutes before departure?

RM 5 for food & beverage (all other costs are sunk for this trip).

Should the agency sell the last seat for RM 10? Explain using marginal analysis.

Yes. The marginal benefit (RM 10 revenue) exceeds the marginal cost (RM 5), so MB > MC.