let's start with a question why is Obama trying to make America more like Sweden when Sweden trying to be less like Sweden this article gained a lot of attention and went viral at the time arguments like this often spread quickly because they seem intuitive and persuasive but here is problem I see a fundamental flow in this way of thinking it completely Overlook economic perspective so let's introduce core economic principle rational people think at the margin let's define what I mean by this simply put marginal thinking is about making decision based on incremental changes rather than All or Nothing choices it's not about choosing between black and white but about analyzing the gray of Shades in between you will see what I mean in a Just moment so what is marginal benefit marginal benefit is additional benefit you get from increase one more unit of activity similarly marginal cost is additional cost of doing so let's illustrate this with example this is my beer example so question is how many ble of beer do you want to drink so this table shows how total benefit and total cost change it with the number of B right so if someone drink zero B beer then benefit is zero cost is zero so Surplus which is a benefit Minus cost that is also zero right by drinking one bottle of beer then benefit Minus cost that's four right and so on so you can have this column of surplus right so now how many bottle of beer do you want to drink to answer this question we want to see where Surplus is maximized so in this example when drinking two or three bottle right Surplus is maximized at six that is the rational choice if we grab this we put the number of beers on the horizontal axis right and total benefit and cost on vertical axis so this blue line is a total benefit you can illustrate this column right similarly total cost that red line is a graphical illustration of this column so graphically the goal is to find where this Gap is widest that is optimal decision than either drinking two or three now to make it simple if we find the two different choices that make us indifferent then we are going to assum we just drink more so let's say drinking three botle of beer is optimal choice in this example right okay now let us come back to concept of marginal benefit and marginal cost how those concept can be used in analyzing this problem so now what is marginal benefit yeah marginal benefit is extra happiness you get from drinking additional beer right so very first beer gives five extra unit of happiness or satisfaction in other words this five of total benefit it all comes from very first B now what about second B so what's the marginal benefit of second B well total is nine but not all of it comes from second B right so when you subtract five from nine we get what four right that's the marginal benefit of second B so out of nine only four unit of happiness comes from second B similarly marginal benefit of s b that is 3 9 2 12 four and fifths 10 two and one so does it make sense so you can calculate marginal cost in the same way then first beer marginal cost all of this cost comes from first B of beer so one what about second bter where total cost increase from 1 to three so it's two right and third B three 9 to I'm sorry 3 to six right and fourth B 6 to 10 fifth B 10 to 15 so we come up with this column of marginal cost all right so given this kind of example you should be able to calculate marginal benefit and marginal cost in this way now here is question we want to understand better using marginal analysis in know was comparing marginal benefit to marginal cost how do we find the optimal decision optimal Choice here the marginal analysis goes like this as long as the marginal benefit is greater than marginal cost we want to do more activity right when marginal benefit is smaller than marginal cost then we want to do less activity the idea is that yeah think about first butter do we want to drink this very first butter where happiness level from first B that's marginal benefit right that's five but just cost from first B is one so definitely we want to drink first B second butter then question is okay now do I want to drink second butter watch the extra happiness that's marginal benefit for now marginal cost is two so we want to drink right what about third B then marginal benefit youal marginal cost so you could say different indeed that is optimal Choice certainly you don't want to drink Force B of beer why then Force beer Force butter it givs extra two unit of happiness but four unit of cost could incur so it's not a rational choice to drink a force but then yeah here is very important principle regarding marginal analysis or marginal thinking what is it optimal choice is made when marginal benefit equal marginal cost all right alternatively we could say that as long as marginal benefit is greater than marginal cost yeah we want to do more otherwise we want to do less so this principle applies not just to drinking beer but to every economic decision from business investment personal choice and all the way to all sort of policy decision this is graphical representation see you know I can illustrate marginal benefit with the blue line and marginal cost with the red line right and then this bottom figure represent Surplus so this column right again question is where do we obtain top of the Surplus right because that is associated with the optimal choice so in our example two or three but we assume when we find the two in different choices we take more so three is optimal choice right that's the top of the Surplus maximum of surplus yeah that's where margin benefit curves intersect marginal cost curve these three key concept we have discussed so far right well let sum up what I believe economy G thinking what it's all about yeah this is my personal take yeah none of the textbook don't explain this way but I I strongly believe economics boosts down to these three ideas first we need to recognize tradeoffs in other words we need to understand the opportunity cost every decision every policy involves tradeoffs because of these tradeoffs we naturally want to make a Best Choice possible we want to optimize our decision if there were no tradeoffs decision making wouldn't even be a problem but since tradeoff we need a strategy for making best choice this brings us to second key concept thinking at the margin making the best choice best choice isn't about picking an extreme it's about finding the right balance most optimal solution take a balanced form most cases think about this way making the best decision is Lally about finding right balance between the tradeoffs for example let's talk about drinking not drinking at all or you know that's not necessarily best choice right your Surplus is zero but drinking too much that's definitely not the best choice either again Surplus is zero right I know some of you go out and drink way too much yeah but let's bear that's not a rational decision when we think rational best choice is some in the middle for me personally I found that drinking three bottles of beer is optimal amount not too little not too much just right so yeah I designed this problem from my experience but as I'm getting older I find it yes optimal choice now should be drinking two botle of beer I need to update this question soon so this framework isn't just for personal decision it applies to policy debates too we can apply this framework to taxes healthc care global warming you name it yeah let's take a look at just common mistake even some Economist fall into this trap honestly if they do I think they need to take this class again I'm serious so what's the mistake the mistake is ignoring tradeoffs some people view the world in a simple linear way assuming that less government intervention always leads to more Prosperity yeah that's actually the argument B by this economist Daniel Mitchell right in his mind the relationship between government intervention yeah more like being Swedish economy right and economic growth so relationship between the two is straight line graphically in his mind he has this kind of relationship between the two more government intervention and economic growth where it's linear relationship if it is linear what does it apply well there is no trade then answer or solution is simply not we need to go to extreme just less and less sness yeah we don't need any government intervention so here at this point you could say yeah libertarian word right yeah that's the best word right of course that is not the world we live in because everything involves tradeoff when we have tradeoffs the world is more like this it's not straight line it's nonlinear right then we can reconsider this argument America has less government intervention than Sweden and we are wealthier right so why would we want to be like a s right so that's argument made by this economist Daniel mitcher now if this is the world we live in now you can see what's the problem with his argument right that way of thinking ignores tradeoff if the world was truly right simple enough as a straight line we would need economics at all but relationship between the two is linear it's curved it's non linear like this just like in our P example yeah look like Surplus graph it so where neither extreme is a Best Choice neither extreme is optimal the best choice is a balance somewhere between so now think of us is somewhere here and Sweden is somewhere here then we can perfectly make sense when us try to be more like Sweden us can be better of at the same time Sweden try to be more like us or less like Sweden yes it can better off right yeah we can think of another policy case using this framework so for any policy it could be about you know healthare reform it could be about taxation right where we have one extreme power Choice which is socialism another extreme is free market between the two yes we have a spectrum right various level of policy so in this case yeah I want to consider just four other possibility between the two extreme and then if you look at here total benefit and total cost we can realize there is tradeoff so as we go toward the free market benefit is increasing but cost is also increasing right yeah as we go toward the free market we also have some cost one of those is in equality and many others right yeah we'll be talking about Market fail problem later so cost is rising as well then again question is what is optimal level of choice we can think at the margin right so just calculate marginal benefit for each level of policy and marginal cost as well then you will come up with this number look at just increasing benefit and increasing cost right and see where marginal benefit equal marginal cost in this particular example you find that there is no place where marginal benefit equal marginal cost right but that's fine still we can apply marginal thinking principle what is it as long as a marginal benefit go uh greater than marginal cost certainly we want to implement thisable policy Next Level yes Next Level yes right so we want to implement this level but what do you see for the next level then marginal cost is greater than marginal benefits so we want to stop here if if you look at Surplus right so benefit Minus cost then you will see at this level Surplus is maximized I will leave this to your exercise yeah this is the economic way of thinking it's not all or nothing it's about finding optimal balance I hope this makes sense don't don't fall into the Trap of black and white thinking use marginal thinking to make better choice