MAKING CHOICES: THE ECONOMIC
WAY OF THINKING -- BENEFIT-COST ANALYSIS (also called Marginal
Analysis or Cost-Benefit Analysis)
Thinking at the Margin (LearnLiberty 4:32)
http://www.youtube.com/watch?v=tMhdTn-5fu8
- ME: "marginal" means "extra" or "additional"
- individuals make choices based on comparisons at the
margin
- when wanting to make the best choice we compare the
options
- "thinking at the margin" means we look at the next option
- why are diamonds more expensive than water?
- because when you compare the value of an extra unit of
water (the marginal unit) with the extra unit of diamonds
- we make choices at the margin all the time, also businesses
- should we hire an extra employee
- we compare the extra cost of that emloyee, called the
marginal cost (MC)
- with the extra benefits that we will get from that worker
-- i.e. the marginal benefit (MB)
Incentives and Marginal Analysis (MrHurdleHistory 8:54)
http://www.youtube.com/watch?v=dN9KyDCur2Y
- to make the best decision:
- select all options where the MB > MC
- up to where the MB = MC
- but never where the MB < MC
- the BEST CHOICE is always where MB =MC
- changes in MB and MC:
- if the MB increase, people will do more
- iof the MB decrease then people will do less
- if the MC increase then people will do less
- if the MC decrease then people will do more