AP Microeconomics
Advanced Placement Microeconomics analyzing individual economic decision-making.
Marginal Analysis and Rational Decision-Making
Thinking at the Margin
Marginal analysis is all about making decisions one step at a time. Instead of looking at the big picture, you focus on the additional (marginal) benefit and the additional cost of your next choice.
How It Works
Rational decision-making means comparing the marginal benefit (extra gain) to the marginal cost (extra expense). If the benefit is greater than the cost, it's a good idea to go ahead!
Everyday Choices
We use marginal analysis all the time, like deciding whether to have another slice of pizza or another hour of studying.
Decision-Making in Action
Businesses use marginal analysis to decide how much to produce. If the extra revenue from making one more product is greater than the extra cost, they keep producing.
Key Takeaway
Making smart choices means always weighing “one more” of something. That’s marginal analysis!
Examples
You study for one more hour if the extra knowledge gained is worth more than an hour of lost sleep.
A bakery bakes one more cake if the money earned is greater than the extra cost of ingredients and labor.
In a Nutshell
Marginal analysis helps people make smart choices by comparing extra benefits and extra costs.