Margins and Thinking at me Margin What does it mean to think at the margin Another application of marginal

Prices and What is Economics? 
On a hot day, that first blast of cold air as you step into an air 
conditioned store gives you a tremendous boost. Each succeeding few 
minutes, though, may give you less pleasure. Economists say your 
marginal pleasure or marginal utility–your marginal benefit–
diminishes as you experience more. 
The word “marginal” in common speech or layman’s use sometimes 
refers to an iffy project. For example, suppose you make sneakers and 
you have a company division that makes gold-colored sneakers with 
specialty soles and that division has turned out not to be the big money-
maker you hoped. Or maybe that division is breaking even but would 
be the first division you would cut unless it starts to show more signs of 
promise. You might refer to that division as being marginal. That usage 
of the word “marginal” is not what economists mean by the term, 
although you might be able to see how they are related. The layman’s 
usage means at the edge or borderline workable. 
The term “marginal cost” is not the same as opportunity cost. 
Opportunity cost is from the perspective of a buyer, while marginal 
cost is from the perspective of a seller or producer. That is, opportunity 
cost refers to what you have to sacrifice–at the margin–as a buyer 
because when you buy one thing you can’t buy something else. 
Marginal cost refers to what a seller or producer has to sacrifice in 
order to sell or produce one more item. 
If you enjoy math, you might find it helpful to see that in economics 
the word “marginal” means the derivative or slope of a curve. It’s the 

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additional cost or benefit that derives from a very small change. For 
example, if you increase your saving by $1, what would be the 
marginal benefit? It would be some small number–say, an additional 5 
cents in interest you might gain, plus some psychological marginal 
benefit–say, something you value at 2 cents–in terms of additional 
feelings of security. The marginal benefit would thus be the sum of the 
5 cents in interest plus the 2 cents in feelings of additional security, or 
$0.07 per additional dollar saved. If you plot a curve between the 
benefits and costs, the slope is .07. That’s the marginal benefit. The 
marginal cost is the inverse. 
Thinking on the margin or marginal thinking means considering how 
much you value an addition of something. You ignore the sunk costs of 
what’s already going to happen, and weigh up the costs and benefits of 
adding in something extra (extra work, money, bananas etc.). 
Explanation of marginal analysis 
If you have no bananas, and your friend kindly gives you theirs, it could 
be so valuable to you that it might mean the difference between life and 
death. But if you have a million bananas (a banana-aire?), that gift is 
worth much less to you (presuming you have a convex utility function 
for bananas). That extra banana in both cases — even if it were the exact 
same banana — is a banana on the margin, and its value varies 
massively between the scenarios. 
As a perhaps more realistic example, a charity might be the most 
effective in the world on average, but if it’s just fundraised a lot, extra 
(marginal) donations might be going into their less effective programs. 

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Say you’re thinking about tending to your banana farm (how else do you 
get a million bananas?), you want to know whether you should work 
more to produce more bananas. You might have already invested a lot in 
making your farm more efficient, meaning that extra resources won’t do 
as much to improve productivity. This is because, in this case, there are 
diminishing marginal returns to investment (though you can also have 
increasing returns, like through economies of scale, advantages of being 
large in scale). 
Another application of marginal thinking is the profitability of software 
companies — their profits at the margin are often very high. They have 
a lot of fixed costs (to develop the software in the first place they need 
to pay a lot of engineers, rent buildings etc.), but it costs the company 
little to download or use a program from the internet. Because marginal 
investments don’t yield as much benefits to you as the first few, we 
should do the the projects with the highest initial returns first, what’s 
called ‘pick the low-hanging fruit’. Back then, Singaporeans (including 
me!) would do anything to sink their teeth into donuts, like joining a 
long snaking queue and standing in the queue for many hours. 
However, as time went by and as I ate more and more donuts, the 
novelty begin to wear off and I was put off by the smell of donuts! And 
I suspect the same for most people as the queues outside donut shops 
shrank. I reasoned that marginal utility for a donut was initially very 
high- high enough to justify the marginal costs of getting a donut (e.g. 
cost of a donut and waiting time which could be better spent). But as 
one consumes a greater quantity of donuts, marginal benefit per donut 

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falls below the marginal costs of gaining one donut and this no longer 
justifies consuming additional donuts. 
Try describing a scenario, an example that uses the marginal principle! 
You will be surprised by how it is used to optimize decision making in 
our daily lives, or even government policies. 
While you’re at it, perhaps you can explain why thinking at the margin 
is beneficial (as opposed to other policies) and the possible difficulties 
of incorporating marginal principle in decision making. 
Marginal principle. I always thought that it was the basic principle that 
everyone uses to do things. Well, I do have a few scenarios. 
Personally, I feel that Music is one example that everyone can associate 
with. I believe we all have the experience of ‘falling in love’ with a 
certain song that you have heard somewhere in a CD shop. Setting aside 
all-time hit songs, I believe all typical trendy songs have a ‘lifetime’ of 
its own. 
It’s pretty habitual for teenagers to get caught up with the passing trend 
and I myself am not ashamed that I am one of these people who buys 
that CD in the shop just because it is nice the first time I hear it. 
[First impressions are sure important =)] 
Other teenagers (including me as well) get caught up in the hype even 
when they didn’t even hear the music for themselves; they just like it 
cause their friend say so. Hence, at this point in time, the marginal 
benefit, e.g. pleasure of hearing the music, acknowledgment from peers 
that you are ‘hippy’ etc, will outweigh the costs of going down to the 
CD shop and buy that CD. Happily, you rip the song into your Mp3 

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player and classify it under ‘Favorites’. 
Then, diminishing marginal utility sets in. The more frequent you hear 
it, the less pleasure you get because people tend to grow sick of certain 
things that is repeated over and over (a social phenomenon, don’t ask me 
why). But, you still feel that it’s worth listening to it and at this point, 
marginal benefit = marginal cost, hence, you still keep it under 
‘Favorites’. 
Lastly, you hear it so often, you can even recite the lyrics backwards, 
and the song gets irritating. Marginal cost > marginal benefit and the 
song goes off your ‘Favorites’ list. 
And then the cycle repeats as the music industry churns out more trendy 
songs. 
A more significant example would be the use of legal drugs, like 
morphine or medical marijuana, which has useful initial effects like 
pain-killing and little side effects on a short term basis (at this point, 
marginal benefits > marginal costs). Then the side effects get worse due 
to long term consumption like addiction and the effects of pain-killing is 
less useful in treatment (marginal benefits < marginal costs), a.k.a 
diminishing marginal utility. 
Also, since these drugs are sometimes sold in pharmacies and are easily 
accessible in certain countries, drug abuse may occur, which leads to the 
banning of these drugs. Then medical groups retaliate and fight for the 
use of such drugs in medical treatments. Governments then struggle to 
decide, whether banning the use of these drugs should be carried out 
since they have a hard time measuring the marginal benefits and 

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marginal costs; whether drug abuse should weigh more, or their use in 
medical treatment weighs more. 
It is hence observed that although marginal principle does explain why 
we do the things we do, it is hard apply it in everything we do. The 
primary reason is that we have different weights which we use to assign 
to different things, like my example on the medical use of drugs vs drug 
abuse. 
I like Benjamin’s take on the marginal principle. Music and computer 
games were the first two examples that jumped into my mind. Since 
Benjamin has thoroughtly explained the marginal utility/cost of popular 
music, I will try to analyse game-playing using the marginal principle. 
Computer games are deemed by many teenagers and young adults as the 
most exciting form of entertainment . A new game, with new characters, 
or astonishing sound/visual effects, can mersmerise gamers easily. When 
beginning to play a game, one is likely to be attracted to the game, 
deriving fun and enjoyment from playing the game via keyboard and 
mouse control. The marginal utility is very significant at this stage. The 
players tend to view it more beneficial to spend time playing the game, 
compared to, say, sleeping. 
However, when the gamer has played the game for a very long time and 
has finished the campaign in game, his interest in this game may 
diminish as the orignial thrill wears off. Furthermore, as nothing is left 
for further conquest, the sense of competition also decreases. As a result, 
the gamer gains less and less marginal utility as he continue playing the 
game. 

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At the same time, “side-effects” of computer gaming, for example, 
weakening eaysight, lack of sleep and negligence of other meaningful 
activities, start to take their toll on the gamer. For every one more hour 
of gaming, the gamer experiences an increasing resistence to game-
playing. this is where the increasing marginal cost comes in. 
As such, the number of hours of gaming should be kept at the optimum 
level to ensure the greatest possible benefit to the gamer. But one 
problem arises from this-the marginal untility and cost of computer 
gaming are not entirely measurable. Thus the perceived marginal utility, 
such as the “coolness” of prolonged gaming, dictates, and sometimes 
misleads the gamer’s choice of the number of hours spent on gaming. 
If you think about it, this can actually be applied to this competition 
(proving that it too, is not above the economics). 
To some, the marginal net benefit from the first post is relatively high, 
due to the novelty and the sheer fun in seeing one’s name in nice block 
letters online. As the holiday homework piles up and the block tests 
draw close, the costs of spending time and energy posting instead of 
mugging start to creep up. 
For others, the marginal net benefit from the latter posts increase, 
perhaps through the intellectual exchange or just the pleasure from being 
able to comment (intelligently) on a variety of issues. 
As Benjamin said, ‘Everything in this world has a trade off’. To those 
who are really interested, however, the trade-off is relatively smaller. 
Hence the net number of (intelligent) posts by said team will be higher. 
In other words, this is a selection mechanism to sieve out the teams that 
are more enthusiastic. 

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The concept of thinking at the margin is only useful when the value of 
each individual unit is not constant. In this context, the n+1th post is 
worth more or less to me than the nth post. This is made true by the 
interactions with the other commentors or by temporal factors. 
The problem, however, is that this assumes that your variable is a 
continuous one, as opposed to a discrete one. (Statistics, anyone?) Let’s 
say my maximum net benefit is obtained by making 10.5 posts. But I 
won’t be able to attain that, for the simple reason that there are no half 
posts. This is an even worse problem for analysing problems such as 
purchasing a car. 
Most of the examples in the comments thus far have centered around 
the concept of diminishing marginal utility, which is in essence a look 
at the psychological motivations behind consumer decisions. To open 
up a further area of discussion, I’d like to look at the related idea of 
marginal returns to factor inputs, which examines technical limitations 
in the short run of applying increasing amounts of a variable factor to a 
constant level of fixed factor. 
It’s easiest to discuss this with a diagram so I’ll be making reference to 
this 
image 
of 
a 
production 
function 
(http://www.cs-
territories.com/cyro//asa2_economics/unit4/images/mppandmrpcurves.
png) as I go along. Simplifying the scenario to just two factor inputs, 
labour and capital, the graph shows the average and marginal 
productivity of labour with respect to a fixed amount of capital in the 
short run. Not to belabour the point too much, I just want to draw 
attention to the MPP curve in particular. Before the number of workers 
labelled L is reached, the firm actually experiences increasing marginal 

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returns to labour, as there is insufficient labour to fully utilize present 
capital. Only after point L does marginal returns begin to diminish, as 
the marginal productivity of the labour is limited by the fixed amount 
of capital. 
A significant point to note IMO is that in any discussion of diminishing 
marginal returns/utility, time period is always an issue. In the long run, 
diminishing marginal returns to labour or capital is not an issue, since 
in theory any combination of labour and capital can be used to achieve 
a desired level of output (though there are diminishing marginal returns 
to technology I suppose). Similarly, all the examples stated are valid 
given a relatively short run time period (e.g. number of hours spent 
gaming in a day, or number of times a piece of music is played over the 
course of a week). If you listened to the piece of music the same 
number of times but over a more extended time period, diminishing 
marginal utility would set in less quickly – and in theory, given a long 
enough time period, DMR/DMU wouldn’t set in at all.