Why is the concept of the “marginal “ so important in economics?
“Marginal” in economics means “additional” and “extra”. It is the idea that firms may take decisions by considering the effect of small changes from the existing situation. Economists rely heavily on the idea that firms, consumers and other economic sectors can make decisions by thinking in terms of the margin. Common marginal concepts in economics include marginal cost and marginal benefit.
Marginal cost (MC) is the change in total cost that results from producing an additional unit of output. Marginal cost pricing is a pricing system that is used extremely often; price is set equal to the marginal cost. Allocative efficiency will then be achieved as the consumer’s valuation of the product (price) is equal to the resource cost of producing the product (marginal cost). In this way, consumer surplus and sum of producer surplus is maximized. Marginal cost is always useful on the pricing polices of firms that may be acting against the public interest. If a firm is selling its product at or below marginal cost, it could be engaged in predatory pricing or limit pricing. These pricing techniques are considered as anti-competitive practices because they restrict, distort or prevent competition in the market. The Competition Commission may use the concept of marginal cost to identify oligopolies in the market and take action to correct the market failure arise from lack of competition.
Marginal benefit (also known as marginal utility) is the benefit you gain from producing or consuming an extra unit. Marginal benefit is often linked the law of diminishing marginal utility, which states that as the quantity of a good consumed increases, the marginal utility derived from that good decreases. The concept of marginal benefit is also used to derive the demand curve. Marginal benefit refers to what people are willing to give up in order to obtain one more unit of good, while consumer surplus represents the difference between what a consumer is willing to pay and what is actually paid. The value of a product to the consumer, represented by the demand curve is therefore the marginal benefit.
Economists believe that consumers make decisions at the margin, which means should one more unit of the good be obtained or not. The consumer will compare the marginal utility and the marginal cost needed to obtain the good. At any particular price, the consumer will continue to buy units of the good as long as the marginal benefit is greater than the price, and will stop until marginal benefit is equal to marginal cost. When marginal cost exceeds marginal benefit, a rational consumer will lower his consumption. Therefore an efficient level of product is achieved when marginal benefit is equal to marginal cost.
When applying marginal concepts to daily life, cost-benefit analysis is very when considering environmental issues. Environmental improvement concerns often revolve around whether we are above or below this point, and whether any additional environmental improvement can provide more benefit that it will cost. In conclusion, “marginal” is very important in economics as it looks at the addition unit only and this can help to set the optimal price. Marginal cost and marginal benefit could provide a guide for firms to set the right price.
