Sunday, October 12, 2008


I believe it’s possible. There’s an economic tool called marginal analysis that can do it. After reading both parts of this blog entry, tell me if you agree.

Are you familiar with the concept of marginal analysis?

It’s an economic concept that you actually apply in everyday life. We make important decisions based on the concept all the time. Let’s use a real-world example.

How many laptops would you like to have? One or two? For most people, one laptop is sufficient, would you agree? You enter a store with $10,000. This is more than enough money to buy two powerful laptops. Would you buy one or two? If you’re like most persons, you’d buy only one and either save the remainder or spend it on another toy. The additional benefit you would derive from a second laptop is marginal (i.e., minimal). That’s the reason why you probably wouldn’t buy a second one. But let’s say you bought that second laptop anyway. How likely is it now that you would buy a third laptop? You probably wouldn’t, would you? In fact, only a very few would.


This is the concept of marginal analysis. The marginal utility (i.e., the additional benefit) you would derive from a second laptop is minimal compared to the marginal utility you would derive from a first laptop. A third laptop will provide even less utility than second.

Marginal analysis, therefore, is concerned with analyzing the value of additional benefits compared to the cost of additional resources. In this case, your resources consist of $10,000. If each laptop cost $3,000, your marginal benefit from the first laptop exceeds the marginal cost of $3,000. In other words, you felt that you gained more—a lot more—by exchanging $3,000 for a laptop. Will you feel the same gain if you bought a second laptop? Probably not. If you’re like most, you would decide that one laptop is enough. In other words, the marginal cost of exchanging another $3,000 outweighs the marginal benefit of owning a second laptop. But let’s say you bought the second laptop anyway, would you take it another step further and buy a third laptop? At this point, 99% of you would say “No.” In other words, 99% of you will decide that the marginal cost of spending another $3,000 outweighs the marginal utility (or benefit) of a third laptop.

Instead of laptops, you can substitute your weekly grocery money and your list of groceries to buy. You could also substitute your appetite. Would you fill yourself up on one dish and not leave room for another? Or would you rather have one of this so that you leave room for that.

This is marginal analysis in action and as this example illustrates, you use it every day.

Marginal analysis is useful because it determines the optimal or best combination of goods and services for a given amount of resources. How about another example? This time we’ll use your hunger as the resource. You sit down to eat. There are three kinds of equally tasty and nutritious dishes on the table. Would you satiate your hunger by eating all of one dish or by eating some of all three? If you ate only one dish, you would deny yourself the benefit of the other two. If you ate two dishes, you would have a tastier and more balanced meal. But if you ate some of all three dishes, you would have eaten the tastiest and most balanced possible meal. It’s in your best interest, therefore, to eat moderate portions of each food in order to have the most satisfying meal. Would you agree?

Marginal analysis determines the point where your marginal benefit is equal to your marginal cost. At that point, you have optimized your choices. Each dish adds to your marginal benefit. Each dish also “costs” you something in the sense that it partially satisfies your hunger.

Marginal analysis can be applied to many things. It can be applied to complex decisions. Like war. Should you wage war on an enemy or find another way to resolve your conflict?

Continued here.

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