Lecture Notes on Thinking on the Margin

Key Concepts

• Marginal: Refers to a little bit more or a little bit less.
• Thinking on the Margin: Involves comparing the marginal benefit to the marginal cost of a decision to arrive at an optimal decision.

Example: Adjusting Volume on a Movie

• Increase volume to hear dialogue better.
• Compare marginal benefit (improved hearing) vs. marginal cost (potential distortion or disturbing others).
• Optimal decision reached when marginal benefits equal marginal costs.

Importance of Thinking on the Margin

• Decisional Approach: A method to find optimal solutions by adjusting one factor at a time.
• Focus: Helps determine what not to think about, such as sunk costs.

Example: Clothing Shop Scenario

• Scenario: Bought 100 pairs of bell-bottom jeans at $75 each, priced at $100.
• Jeans not selling at $100; consider lowering price despite accountant's advice.
• Sunk Cost: Original price paid is irrelevant to current decisions.
• Options:
  • Store jeans hoping future demand increases.
  • Slash price to $50, clear inventory, invest in new trends (e.g., leg warmers).

Sunk Cost Fallacy

• Definition: Focusing on historical costs that cannot be recovered.
• Example: Continuing poor investments due to past expenses.
• Advice: Ignore past mistakes, focus on future opportunities.

Practical Advice from Economists

• "Never give up" is not always beneficial.
• Smart Decisions: Sometimes it’s better to quit or shift focus.

Summary of Key Points

1. Marginal Thinking: Evaluate a bit more or less until benefits equal costs (optimum).
2. Cost-Benefit Analysis: Focus on changing costs/benefits, ignore sunk costs.

Application in Economics

• Useful beyond academic settings.
• Includes teaching materials and practice questions for further learning.