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Economics Definition: Thinking at the Margin

For our third economics term, let's look at thinking at the margin, presented to us by, today, by Google.

Thinking at the margin:
Thinking about the costs and benefits of making changes in behavior.

This is the only definition that I could between using Google's "define" function, and Dictionary.com. I found a great example in the economics textbook, Economics Principles in Action, published by Prentice Hall.

From page 10: deciding whether to do or use one additional unit of some resource.

I like that much better. Basically, it is an analysis to find the optimal return on actions. Basically, you decide when to stop. For instance, we could come up with a method to determine how much the freethrow percentage would increase for a basketbal player based on how many extra hours the player practices. Here is an example given with a decision making matrix:



As we can see, the amount of benefit we can receive by incrementally increasing our effort is not constant. This is the case for nearly anything. For instance, if we have 80 acres with which we can grow corn or raise horses, we could choose to use all the land for corn or all the land for horses. However, all the land is not equally suited to do either task. As an example, 40 acres could be optimally suited for growing corn, while another 30 acres is moderately okay for growing corn. The remainder of the land is poor for growing corn. On the same token, perhaps the 30 remaining acres are optimally suited for raising horses, while 20 of the acres are moderately suited for raising horses. The rest of the land would be poorly suited for raising horses. We are going to simplify this by stating that only the moderate portion may overlap.

So, we would use all 40 acres that are optimally suited for growing corn, to do so. On the same token, we would use the 30 acres that are optimally suited for raising horses to do so. The only thing left is the moderate land. While 20 of the 30 acres are moderately good for raising horses, all of it is moderately good for growing corn. We could choose what is more important and make our desicion that way. If horses are more important, we would use the 20 acres that are moderate, and use the other ten for corn.

Let's assume we can raise two hours for every optimally suited acre, one horse for every moderately suited acre, and one horse for every three poorly suited acres. Using the desicion making matrix we could come up with these results:



So we can see, even though we are adding more and more land, our output per unit of land decreases. This is why we make decisions based on the best overall output for our effort. This may not seem important for you personally, but it can help you understand the motives of some people and companies, and it can help if you become the manager or owner of a company. Also, if you ever are given the choice between using land for horses or corn, you have a nice head start.

Blogger Stuff You Should Know Says:

May 13, 2006 10:42 PM 

I can't say I disagree.

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