Economics

Study Notes

Marginal decisions in economics

Level:
AS, A Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

What is the importance of the margin when making choices? Marginal in economics means having a little more or a little less of something

It refers to the effects of consuming and/or producing one extra unit of a good or service

  • Marginal benefit – is the change in total private benefit from one extra unit
  • Marginal cost – is the change in total private cost from one extra unit

Rational consumers and producers are assumed to calculate the marginal cost and benefit of each decision. Behavioural economics questions and challenges the use of marginal decisions or every choice.

Examples of the marginal concept used in A level economics

Theory of the firm
  • Marginal product - diminishing returns
  • Marginal cost - linked to marginal productivity of variable factors, a variable cost
  • Marginal revenue - the change in revenue from selling an additional unit
  • Marginal profit - the profit on the next unit produced and sold
  • Profit Max - where marginal revenue = marginal cost
  • Revenue Max - an output where marginal revenue = zero, price elasticity of demand = 1
  • Perfect price discrimination - complete separation of the market, the demand curve becomes the MR curve
Labour market
  • Marginal revenue product of labour (MPPL x Price of output)
  • Marginal cost of employing labour
  • Marginal rate of substitution e.g. of labour for capital (or vice versa)
Externalities, Merit & De-Merit Goods, Public Goods
  • Marginal cost of supply
  • Marginal private social
  • Marginal social cost
  • Marginal private benefit
  • Marginal social benefit
  • Marginal abatement cost i.e. cost of reducing C02 emissions by one tonne.
Macroeconomics
  • Marginal rate of tax
  • Marginal propensity to save
  • Marginal propensity to spend
  • Marginal propensity to import
  • Marginal efficiency of capital (Keynesian investment demand curve)
  • Marginal product applied to the benefits of specialisation and exchange

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