Marginal Change (Thinking at the margin)

Definition
Per (Gans et al.) thinking at the margin means considering the additional costs or benefits of a small change in one’s current situation.

The cost associated to a marginal change is called marginal cost
The benefit associated to a marginal benefit is called marginal benefit.
Rational people make decisions by comparing marginal benefits and marginal costs.

Why It Matters
- determine if additional benefits are greater than additional costs
- instead of focusing on business output as a whole, thinking at the margin focuses on the cost of producing/consuming one more unit of a good
- helps determine best course of action when there are 2 options but only 1 is possible

Example
Suppose you are considering watching a movie tonight. You pay $12 a month for a streaming service that gives you unlimited access and you typically watch eight movies a month. How should you calculate the cost when deciding whether to watch another movie? You might think its $12/8 or 1.50, which is the average cost of a movie. However, more relevant for your decision is the marginal cost - the extra cost that you would incur by streaming another film. Here the marginal cost is zero* because you pay the same $12 for the service regardless of how many movies you watch. In other words, at the margin, streaming a movie is free.

*Technically, there is an implicit cost too.

Limitations
A limitation of thinking at the margin is making decisions based on predictions and assumptions rather than actual results. “If the project income is not realised as predicted, the marginal analysis will prove to be worthless.” (CFI Team)

Works cited:
CFI Team. “Marginal Analysis.” Corporate Finance Institute, 2024, corporatefinanceinstitute.com/resources/economics/marginal-analysis/.

Gans, Joshua, et al. Principles of Microeconomics. South Melbourne, Victoria, Australia, Cengage Learning Australia, 2021.