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Margins and Thinking at the Margin
REJA:

1. Introduction

2. Definitions and Basics

3. The Marginal Revolution

4. Advanced Resources

Introduction

What does it mean to think at the margin? It means to think about your next step forward. The word “marginal” means “additional.” The first glass of lemonade on a hot day quenches your thirst, but the next glass, maybe not so much. If you think at the margin, you are thinking about what the next or additional action means for you.
How many additional tomatoes can you get by taking better care of your garden? If an hour extra work weeding means you will get 12 more tomatoes, then one additional hour of work results in 12 additional tomatoes. Economists sometimes summarize that by saying your marginal product of labor is 12. That just means you can get 12 more tomatoes for one additional hour of work.
On the flip side of that, you could equally well say that the marginal cost of a producing one additional tomato is 5 additional minutes (1/12th of an hour) of your labor. Every new tomato costs you another five minutes of weeding. As another example, if one additional Facebook friend costs you an additional 10 minutes of attention, then the marginal cost is 10 minutes of your time per new Facebook friend.
A bus that is half-empty can take on more riders with zero or very little extra cost–perhaps just a few cents more for wear and tear and the cost of gas to haul an extra 150 pounds. Economists would say the marginal cost of an additional rider is nearly zero. But, if buses are always running packed with lines left standing, then the marginal cost of additional riders would be the entire cost of adding another bus. It is very common to have to compare different marginal costs for different scenarios in order to decide which alternative to pursue.
When you drive around the block to park your car for a concert or event, you can keep driving around the block waiting for that perfect, free, on-street parking spot to come available. Or, you can weigh the alternative of spending $10 for a paid parking lot spot. What matters is what you do in the next minute, ten minutes, hour, or day. The marginal cost of finding a parking space could be only $10; or it could be another hour of driving around hoping for a free spot to open up just as you are in position to grab it. If you already spent an hour searching for a great parking spot, you may well do better to let that memory go. Thinking at the margin means to let the past go and to think forward to the next hour, day, year, or dollar that you expend in time or money. What’s better for you now or in the next few minutes? If you think at the margin, you are thinking ahead. At some point, if you continue to drive around the block again and again with no results, an economist would encourage you to think about the future instead of bulleting on the past. You can’t change the past, but you can change what you do next. (Economists sometimes summarize this by saying, “Sunk costs are sunk.”) And in what you do next, you should weigh the costs and benefits starting afresh for the next few minutes of your time–which is what economists mean when they say, “Think at the margin.” At the margin, you could get a parking spot for $10 or you could drive around and maybe get a parking spot for free with a probability of, say, 20% in the next hour. Thinking at the margin means weighing those future options, and not focusing on what you did in the previous hour of frustrating circling around.
The marginal cost of producing computer chips is the entire cost of producing one more computer chip. Producing only one more from your existing equipment and workers may entail only a small cost that is only an additional few pennies per chip. But if you are already maxing out your production, producing even one more may entail producing a hundred thousand more. Which in turn may entail building a new factory and hiring all its workers, or even researching a whole new way to produce chips–perhaps an additional hundred thousand dollars, at an average cost of a dollar per additional chip or even an additional few million dollars. You have to consider all the additional costs for each option before making a decision. Maybe to get just one more chip you still have to pay extra to hire an extra worker to work the night shift, plus hire someone to stand by to do a little more machine maintenance. Maybe paying more overtime for even one more worker will mean paying higher taxes or insurance fees, or will entail more explanations to other workers about why you can’t offer full opportunities for the extra opportunities to everyone. The sum of all those additional costs–from wages to insurance to taxes to emotional burdens and effects on morale–to produce one more computer chip is what economists mean by the marginal cost of a computer chip. You can’t add apples to oranges, so you may have to weigh the various costs in different dimensions. See Real, Relative, and Nominal 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 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.
Definitions and Basics