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1.1 Marginal Thinking SC

Marginal Thinking

  • Definition: thinking at the margin = decision-making about how much more or less to utilize a resource.
  • Marginal = added unit.

Marginal Concepts (graph)

  • Axes: P (price) vertical; Q (quantity) horizontal.
  • Curves: MB (marginal benefit) downward sloping; MC (marginal cost) upward sloping.
  • MB: additional benefit from one more unit.
  • MC: additional cost from one more unit.

Allocative Efficiency

  • Occurs where MB = MC; quantity Q^* (socially optimal).
  • If below Q^*, MB > MC (consume more).
  • If above Q^*, MB < MC (consume less).

Rational Thinking at the Margin

  • Consumers: weigh the next unit's MB vs MC (eg groceries).
  • Firms: hire/produce more if MB > MC.

Takeaways

  • Marginal thinking applies to both consumers and firms.
  • Key condition: MB = MC for allocative efficiency.