KWCh_07_Making_How_Much_Decisions_The_Role_of_Marginal_Analysis

KWCh_07_Making_How_M - chapter 7 > Making Decisions Section 2 Making How Much Decisions The Role of Marginal Analysis As the story of the two wars

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>> Making Decisions Section 2: Making “How Much” Decisions: The Role of Marginal Analysis chapter 7 As the story of the two wars at the beginning of this chapter demonstrated, there are two types of decisions: “either–or” decisions and “how much” decisions. To help you get a better sense of that distinction, Table 7-3 offers some examples of each kind of decision. Although many decisions in economics are “either–or,” many others are “how much.” Not many people will stop driving if the price of gasoline goes up, but many people will drive less. How much less? A rise in wheat prices won’t necessarily per- suade a lot of people to take up farming for the first time, but it will persuade farm- ers who were already growing wheat to plant more. How much more? To understand “how much” decisions, we use an approach known as marginal analysis . Marginal analysis involves comparing the benefit of doing a little bit more of some activity with the cost of doing a little bit more of that activity. The benefit of doing a little bit more of something is what economists call its marginal benefit , and the cost of doing a little bit more of something is what they call its marginal cost .
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Why is this called “marginal” analysis? A margin is an edge; what you do in mar- ginal analysis is push out the edge a bit and see whether that is a good move. We will begin our study of marginal analysis by focusing on marginal cost, and we’ll do that by considering a hypothetical company called Felix’s Lawn-Mowing Service, operated by Felix himself with his tractor-mower. Marginal Cost Felix is a very hard-working individual; if he works continuously, he can mow 7 lawns in a day. It takes him an hour to mow each lawn. The opportunity cost of an hour of Felix’s time is $10.00 because he could make that much at his next best job. His one and only mower, however, presents a problem when Felix works this hard. Running his mower for longer and longer periods on a given day takes an increasing 2 CHAPTER 7 SECTION 2: MAKING “HOW MUCH” DECISIONS: THE ROLE OF MARGINAL ANALYSIS TABLE 7-3 “How Much” Versus “Either–Or” Decisions “How much” decisions “Either–or” decisions How many days before you do your laundry? Tide or Cheer? How many miles do you go before an oil Buy a car or not? change in your car? How many jalapenos on your nachos? An order of nachos or a sandwich? How many workers should you hire in your company? Run your own business or work for someone else? How much should a patient take of a drug Prescribe drug A or that generates side effects? drug B for your patients? How many troops do you allocate to your invasion force? Invade at Calais or at Normandy?
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toll on the engine and ultimately necessitates more—and more costly—maintenance and repairs. The second column of Table 7-4 shows how the total daily cost of Felix’s business
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This note was uploaded on 04/13/2010 for the course ECON 1110 taught by Professor Wissink during the Fall '06 term at Cornell University (Engineering School).

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KWCh_07_Making_How_M - chapter 7 > Making Decisions Section 2 Making How Much Decisions The Role of Marginal Analysis As the story of the two wars

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