126 Decision Making
126.006 Decision Making - Making decisions on the margin

Decision making on the margin

From an economist's perspective, making choices involves making decisions 'at the margin' -- that is, making decisions based on small changes in resources:
- How should I spend the next hour?
- How should I spend the next dollar?

There is an excellent and simple example of working an hourly job and the marginal utility of each hour of work. Eventually your marginal benefit of earning another hour of pay is outweighed by the marginal utility of not working that hour.

More generally, optimal outcomes are achieved by examining marginal benefit and marginal cost for each incremental action and performing all of the actions where marginal benefit exceeds the marginal cost and none of the actions where marginal cost exceeds the marginal benefit. Because marginal benefits tend to decrease as one does more of an activity but marginal costs tend to increase, the marginal analysis will usually define a unique optimal level of activity.

  • economics
  • decision-making