Marginal Thinking

Marginal Utility- measure of satisfaction

Marginal Cost- measure of increasing cost

Marginal Benefit- measure of increasing benefit

MC=MB- increased cost equals the increased benefit (Equilibrium)

Law of Diminishing Marginal Benefits- A law of economics stating that as a person increases consumption of a product - while keeping consumption of other products constant - there is a decline in the marginal utility that person derives from consuming each additional unit of that product. 

http://www.youtube.com/watch?v=y8gt_1beAmw

Profit Maximizing level MRP= MCR

Most inputs must be bought, hired, or rented. (Economists call the cost of an additional input the marginal resource cost, or MRC.) For a firm to make a profit from an added input, the additional revenue must exceed the additional cost. Economists take this commonsense idea and put it into economic jargon, saying that a firm should increase the use of an input if MRP exceeds MRC and reduce the use of an input when the MRC exceeds MRP. Therefore, when MRP equals MRC the firm should neither increase or decrease the input--it has found the profit-maximizing level.

MRP > MRC- increase the input MRP < MRC- stop inputMRP=MRC, neither increase or decrease- profit maximizing level (efficient)

Example: wage = $20 Price per product= $10

Workers Production MP MRP= MP(P) MRC0 - - - -

1 5

2 12

3 16

4 18

5 19

6 17

5

7

4

2

1

-2

$50

$70

$40

$20

$10

$20

$20

$20

$20

$20 x

Profit Maximizing level

“Leaving money on the table”

Charity

Marginal Social Cost

The total cost to society as a whole for producing one further unit, or taking one further action, in an economy. This total cost of producing one extra unit of something is not simply the direct cost borne by the producer, but also must include the costs to the external environment and other stakeholders (Spill over)

Calculated as:

Where:MSC =  Marginal Social Cost MPC = Marginal Private Cost  MEC = Marginal External Cost 

PollutionSoundEye soresCigarettes

Marginal Social BenefitMarginal social benefit is equal to the private marginal benefit a good provides plus any external benefits it creates. In other words, MSB gives the total marginal benefit of the good to society as a whole. 

MSB = MB private + MB externality (spillover)

Examples:  Safety features, flu shots, 

As an example, suppose a company is thinking about buying and redeveloping part of an old abandoned industrial site near the center of a city. Such areas are called "brownfields" and are a big problem for many cities because they are unsightly and may be polluted. Redeveloping them often produces big external benefits.