Margin means the edge. Marginal changes are small changes to an existing plan of action (Karscig). Marginal cost and marginal benefit are economic principles based on which rational people make decisions. This means that people do not look at total costs and total benefits derived while making an economic decision; rather they take into account the increases/decreases in cost/benefit with purchase of every unit. Thus, people make decisions by comparing costs and benefits at margins (Karscig). The process of decision making with marginal changes explains Mankiw’s principle that rational people think at margins (Stoner). Assuming that there is a ‘Buy One Get Half Off’ sales promotion at a nearby store, it is important to understand how customers respond to it and why. Since a rational person thinks at margins, he or she will calculate the marginal cost of buying the second unit. The marginal cost of purchasing the second is 50% lesser than the first unit purchase. While the marginal cost has decreased by 50%, the marginal benefit will not decrease proportionately if it is a utility product. Hence, when weighing cost/benefit for purchasing the second unit, marginal benefit is much greater than the marginal cost and the purchase takes place. This is how such sales promotion scheme works.
This example explains Mankiw’s principles on rational people thinking at margins while making an economic decision. Rational people will perform an economic activity only when the marginal benefit derived from the action is greater than its marginal cost. This rational behavior of people helps in creating efficiencies in the market economy and drives it towards a perfect market situation, which ensures maximum benefit to maximum number of people.
Works Cited
Karscig, Mark P. “Principles of Economics”. Berkeley.edu, 2011. Web. 11 Jun. 2012.
Stoner, Alice. “Applying Mankiw’s Principles to the Energy Crisis”. Greenchipstocks.com, 2012. Web. 11 Jun. 2012.
