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.