A main tenet of economics, the efficiency principle states that things are working most efficiently when the allocation of resources leads to marginal benefits that are equal to marginal social costs.
If marginal costs and benefits aren't equal, it means somebody owes somebody else...something. If a factory is pumping toxic fumes into the air, causing the neighborhood nearby to have a rate of lung cancer and costing them expensive medical bills, the company needs to pay for the cost that equals the cost that the neighborhood is incurring from the pollution to make things efficient.
Just like pollution can cause deadweight loss (the measured gap between reality and equilibrium), so too can a surplus or shortage of goods in the market. A surplus means the producer has too high of a quantity of goods, which is wasteful. A shortage means consumers want more, but can't have it, which is lost value to the economy. In a perfectly efficient world, supply equals demand, and marginal benefit equals marginal costs.
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Econ: What is Marginal Analysis?7 Views
And finance Allah shmoop what is marginal analysis All right
people You know that moment the one when you think
just one more One more cookie One more cup of
coffee One more bite and then just one more And
you know one more until you realize that one more
one more time maybe is not such a good idea
when you're having that just one more moment Economists call
this thinking on the margin The margin is just when
you add one more For instance your marginal benefit of
just one more cookie after you've already had one is
probably still maybe net positive But after you've had ten
cookies and your stomachs of rumbling saying What are you
doing to me Why to which you say I'm a
slave to my taste buds What's it to you Stomach
When the cost of just one Mohr outweighs the benefits
it's usually time to call it quits Well marginal analysis
is when we look at things from this perspective by
asking what would happen to the output if we added
just one Mohr input Well our cookie examples an example
of the law of diminishing marginal returns which is just
one way we can use marginal analysis diminishing marginal returns
It's when we get less and less benefit from the
same input So we get less and less enjoyment from
each cookie with each additional one that we eat until
eventually It's enjoyable anymore Like your digestive system can only
handle so much Marginal analysis has used everywhere when we
look at consumers consuming when businesses air trying to minimise
costs and when governments air tinkering around with the financial
models on howto incentivize us Teo do things any time
you see the word marginal Like in marginal cost of
production and marginal propensity to consume it refers to thinking
on the margin when the input changes a tiny bit
Well how does that affect the output in it What
rate for instance marginal propensity to consume asks when consumers
have more disposable income in their pockets How much more
money are they in fact spending well as opposed to
investing it or hoarding it under your mattress Because you
forgot inflation was a thing Oops What marginal analysis is
important for firms as well as cookie eaters Firms want
to make just one more just one more Just one
more of whatever they're selling like say a waffle irons
that make keyboard shaped waffles until they stopped making money
selling them the keyboard shaped waffle iron Producers find that
sweet spot where marginal costs equal marginal revenue which is
where the cost of just one more waffle iron equals
the revenue they make by selling that one more waffle
iron right If they go below it like they can't
sell it well then there actually losing money producing more
waffle irons Well just like when you ate cookies you
basically ate them until your marginal cost equalled your marginal
benefit As long as the marginal benefit is higher than
the marginal cost it's hard to say no to the
cookies whispering your name from the sugar stores in the
kitchen But when all of a sudden you realize eating
one more cookie is going to do more harm than
good when your marginal costs of just one more cookie
is higher than your marginal benefit of just one more
cookie well then you call it quits Unless you're a
mascots they want then your marginal cost Might it also
be benefits But we'll save that complication for Advanced Micro
economics The government uses marginal analysis on a mega scale
in the aggregate as economists say like when the Fed
is in the Federal Reserve lowers interest rates Jost a
smidge of a percentage making borrowing money cheaper to try
to get people to borrow just a smidge more Right
Okay well marginal analysis is all about tinkering at a
little more Take away a little less to see what
happens next time Your tinkering well maybe with deciding how
many keyboard shaped waffles you should make with your new
keyboard Waffle Iron Well just remember now you're thinking like 00:03:41.543 --> [endTime] an economist tasty
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