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Marginal costs and benefits are important in economics. Determining marginal cost is important in deciding whether or not to adjust the rate of production, where marginal benefits is the benefit gained in changing the rate of production.
Without realization producers and consumers everywhere thinks about marginal cost and benefits. We all make decisions that are in our best interest. In another words, when we buy or produce items we ask our selves simple questions. Would it cost cheaper to buy one more item? Or dose it cost more to produce one more item? And what would be the benefit of acquiring one more item? People make decisions depending on there reasoning.
Decision making is also very important in economics; it can be simple yet complex. Each decision that is made, along comes with it risks and benefits. According to N Gregory Mankiw Principles of economics (2007), we face difficult decisions that require us to keep in mind four basic principles of economic decision making.
The first principle that the author mention is that “people face trade-offs.” People face trade-offs to get things that they want but in return they have to give up other things that are important to them. The second principle is “the cost of something is what you give up to get it for,” that means its not just the terms of monetary costs but all opportunity costs as well. The third is “rational people think at the margin”. People think marginally by taking action if and only if the marginal benefits exceed the marginal cost. Forth and last “people respond to incentives.” Responding to incentives mans people choose activities by comparing benefits to costs. Any change in either the benefits or the costs may change there behavior.
Marginal cost is descried by investopedia.com as the opportunity cost associated with producing one more additional unit of a good. Let’s use shirts for example, by looking at the marginal cost of printing 13 shirts instead of 12. The cost of printing 12 shirts is $120 and the cost of printing 13 shirts is $126. The marginal cost of printing that extra shirt is $6. We noticed that the total cost always increases as the number of shirts increase.
Marginal benefit is described by investopedia.com as what people are willing to give up in order of obtaining one more unit of a good or shirt as in our example, on the other hand marginal cost refers to the price of what is being lost to manufacture that additional shirt. An additional shirt can be printed as long as the marginal benefits exceed the marginal costs
Marginal cost is very important to companies because it is the measurement that accounts for increasing or decreasing costs of production, which allows a company to evaluate how much there cost is in printing that one more shirt.
Principles of economics affect decision-making in our economy as a whole by the involvement of people with making economic decisions in there dally lives. Some of those decisions involve cooking at home or going out to dine. Also, when people decides to buy a home or just rent. It is about how we allocate resources in the face of scarcity. The economy affects us because we are all consumers. By being a consumer I am a part of the system.
Mankiw, N. (2007). Principles of Economics, (4th ed.)
The Environmental Literacy Council – Marginal Costs & Benefits. Retrieved from http://sorrel.humboldt.edu/~economic/econ104/marginal/
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