Thinking at the Margin

Thinking at the margin means planning your next step. The word "marginal" takes on the meaning "additional." When you think at the margin, you are considering what the next step or action will mean for you. It is important to keep in mind that the terminology "marginal cost" does not refer to "opportunity cost." Marginal cost comes from a producer or seller perspective while opportunity cost comes from a customer or buyer perspective. Marginal cost refers to something that a produce or seller has to give up to run another production or make another sale. Opportunity cost refers to something that a buyer has to give up in order to buy one product over a different one.

Are you still confused about this concept? There are a number of examples that can shed more light on the notion of thinking at the margin.

Garden example

If you tend to your garden more often, how many additional tomatoes will you be able to yield? You learn that if you put in an extra hour of weeding and watering each week, you get an extra 12 tomatoes. Thus, this extra hour of work produces 12 additional tomatoes. Economists refer to this phenomenon as a "marginal product of labor." For this situation, the marginal product of labor is 12.

You can also turn this situation around and consider the marginal cost. Maybe you have to weed and water for an extra five minutes to get one extra tomato. This means that it costs you five minutes of weeding and watering for one tomato.

Bus example

The number of passengers that a bus regularly carries has as impact on the amount of gas and maintenance that the bus requires. If there are a significant number of passengers for particular routes that leave many people standing on each ride, the bus line may even have to consider adding more buses. When a bus is regularly running with only half its passenger capacity, there will be no or very little extra cost to add a few more riders. However, if the bus begins running at full capacity, the cost and general wear and tear on the bus will be significantly higher. It not unusual for transportation companies to weigh these various marginal costs for different scenarios in order to make company decisions.

Parking example

Have you ever attended an event where there were limited parking options? If this situation occurs, you have to weigh whether you want to keep searching for a free parking spot or heading to a $10 parking lot or garage spot. The marginal cost of obtaining a parking space will be either time or money. Is it worth sacrificing an unknown amount of time to locate a free spot or is it a better investment to put down the $10 for the guaranteed, immediate space? Many people will set a limit on the time they are willing to spend searching before they relent and head to the parking lot or garage.

For this scenario, thinking at the margin requires letting go of the past and thinking ahead as you consider this set amount of time that you will be spending time or money. What will serve you best during the next ten minutes of your life? If you continue to drive around and around the same area, searching fruitlessly for that free street spot, risking being late to the event, you may not be putting enough stock in the future. It is not possible to change the past, but you can change what you do next. In the economic world, this concept is summed up as "Sunk costs are sunk."

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