Microeconomics- Chapter 1- Marginal Principles and Interdependence principle

P1 marginal principle

deals with “either/or questions”, focuses on costs and benefits

P3 Marginal Principle

deals with “how many questions” -decisions are best made in small increments , for quantity provisions one focus on marginal costs and marginal benefits

Example of Marginal Principles

How many slices of pizza should I eat?(Should I eat one more slice)

1st slice of pizza gives you 15$ of additional benefit MB=5$ Total Benefit=5$

2nd slice of pizza gives 4$ of additional benefit MB=4$ Total benefit=9$(4+5)

Marginal Benefit

the extra benefit for one more unit

Marginal Costs

The extra costs from one more unit, different from marginal benefit

Marginal principle

take an action, whenever MB>=MC (assume you can take no action when MB= MC)

Economic surplus

MB-MC

diminishing marginal returns

marginal benefit will eventually, decrease as you take an action (Bruce eating cake in matilda)

Rational Rule

keep during something until MB=MC if MB=MC, our economic surplus=same, but if MB<MC we are worse off , If MB decreases, we should stop at a point where MB =MC, at point where MB <MC

Example of Rational Rule

Assume marginal cost=5$ for each slice

Slice MB MC Should you buy the slice?

1 7 5 Yes 7>5

2 6 5 Yes 6>5

3 5 5 Yes 5=5

4 4 5 No 4<5

Assume Marginal cost =5.50$

Slice MB MC Should you buy the slice?

1 7 5.50 Yes 7>5.50

2 6 5.50 Yes 6>5.50

3 5 5.50 No 5<5.50

4 4 5.50 No 4<5.50

Interdependence principle

your best choice depends on your best choices of others, changes in other markets and expectations about the future