Marginal Benefits And Marginal Costs
Economics
Luis D. Maymí Romero
University of Phoenix
ECO/212
Prof. Mayra Malpica Rivera
April 27, 2015
Economics
There are four principals of decision making:
People face trade-off
The cost of something is what you give up to get it
Rational people think at the margin
People respond to incentives
The first principle can be summarized with the following phrase “There’s never a free lunch” every time that you need something you have to give something in return. One example is an employee that needs a particular day off. He could just miss work and not get paid or ask for a change of schedule and not miss work. This allows flexibility or compromise between parties.
Previous to making any decisions on the trade off you should always consider the cost. At times the cost of some actions may not be apparent at a glance. The cost of any given project may reflect on the outcome of your decision.
Never assume that everybody is rational. Rational people rarely decide in black and white but for the most part their decisions are in the gray area. As you go deeper into economics, you will encounter firms that decide how many workers to hire and how much of their product to manufacture and sell to maximize profits.
Incentives, who doesn’t like a positive incentives? Keep in mind that if there is positive incentive there can also be negative ones. Rational people will always keep in mind the cost and benefits of a project and they will respond to the incentives provided for the completions of given task.
An example of marginal benefits and the marginal costs of consider an airline deciding how much to charge passengers who fly standby. Suppose that flying a 200 - passenger plane across the United States costs the airline $100,000. In this case, the average cost of each seat is $100,000/200, which is $500. One might be tempted to conclude that the airline should never sell a ticket for less than $500. In fact, however, the airline can raise its profits by thinking at the margin.
Luis D. Maymí Romero
University of Phoenix
ECO/212
Prof. Mayra Malpica Rivera
April 27, 2015
Economics
There are four principals of decision making:
People face trade-off
The cost of something is what you give up to get it
Rational people think at the margin
People respond to incentives
The first principle can be summarized with the following phrase “There’s never a free lunch” every time that you need something you have to give something in return. One example is an employee that needs a particular day off. He could just miss work and not get paid or ask for a change of schedule and not miss work. This allows flexibility or compromise between parties.
Previous to making any decisions on the trade off you should always consider the cost. At times the cost of some actions may not be apparent at a glance. The cost of any given project may reflect on the outcome of your decision.
Never assume that everybody is rational. Rational people rarely decide in black and white but for the most part their decisions are in the gray area. As you go deeper into economics, you will encounter firms that decide how many workers to hire and how much of their product to manufacture and sell to maximize profits.
Incentives, who doesn’t like a positive incentives? Keep in mind that if there is positive incentive there can also be negative ones. Rational people will always keep in mind the cost and benefits of a project and they will respond to the incentives provided for the completions of given task.
An example of marginal benefits and the marginal costs of consider an airline deciding how much to charge passengers who fly standby. Suppose that flying a 200 - passenger plane across the United States costs the airline $100,000. In this case, the average cost of each seat is $100,000/200, which is $500. One might be tempted to conclude that the airline should never sell a ticket for less than $500. In fact, however, the airline can raise its profits by thinking at the margin.
References: Gregory, N. (2009). Principles of Economics (5th ed.). Mason, Oh: South-Western Cengage Learning. Hubbard, R. & O’Brien, A. (2010). Economics (3rd ed.). Boston, MA: Pearson Hall.