1. Marginal Cost v. Marginal Benefit
Marginal analysis
Marginal Cost v. Marginal Benefit

2. Today’s objective After today’s lesson, students will be able to…
Understand and distinguish between the two types of economic decisions
“Either-Or” and “How Much” decisions
Understand the method of economic decision making
Weighing the costs and benefits of any activity before undertaking that activity
Essential Skill:
Demonstrate understanding of concepts

3. “Either-Or” or “How Much”
The state government is considering whether to build a public library or a new elementary school.
“Either-Or” Decision
Executives at Apple Computer are debating whether or not to produce an additional 300,000 IPhones this year
“How Much” Decision
You have been accepted into the Peace Corp and will be posted to the Czech Republic. You must now decide whether to join the Peace Corp or to go to school full time at the University of Florida
You are deciding whether to cut back your 30-hour work week to 20 hours so that you can take an evening class at your local college.
The price of tuition at your community college has gone up. You’re considering taking less credits.

4. Margin The margin is defined as “the next step”
It could be an incremental step (a little bit more) or a detrimental step (a little bit less)
The principle of marginal analysis is use to answer the “how much” question.

5. Marginal Analysis involves comparing
The benefit from the next step which is called Marginal Benefit
WITH
The cost of taking the next step which is called the Marginal Cost

6. Marginal Analysis If Marginal Benefit > Marginal Cost
The activity yields a Net Marginal Benefit
If Marginal Benefit < Marginal Cost
The activity yields a Net Marginal Cost
If Marginal Benefit = Marginal Cost
You have reached the optimal quantity

7. The Rule of Marginal Analysis
The optimal quantity is the quantity at which:
Marginal Benefit = Marginal Cost or
Marginal Benefit > Marginal Cost

8. Applying Marginal Analysis
Example 1:
Jerry owns a candy store. The store's revenues depend on the number of hours the store is open each day as shown in the Table below. The cost of staying open each hour is $10. If Jerry follows the marginal principle, how many hours each day should he keep his store open?
Hours
Open
Total Revenue
(Total Benefit) $ 1 25 2 45 3 60 4 70 5 75 6 79 7 81

9. Solving the problem Step 1: Determine what is the marginal benefit?
The marginal benefit is the marginal revenue or incremental revenue.
Hours
Open
Total Revenue
(Total Benefit) $
Marginal
Benefit
(∆ Total Benefit) 1 25 2 45 20 3 60 15 4 70 10 5 75 6 79 7 81
Now that one colored row should stand out after I say it. Please use a different color for the text in that row, 9

10. Step 2: What is the marginal cost?
The marginal cost is what Jerry has to pay to keep the store open for each additional hour.
Hours
Open
Total Revenue
(Total Benefit) $
Marginal
Benefit
(∆ Total Benefit)
Cost $0 1 25 10 2 45 20 3 60 15 4 70 5 75 6 79 7 81
Now that one colored row should stand out after I say it. Please use a different color for the text in that row, 10

11. Net Marginal Benefit/Cost
Step 3: Compare the marginal benefit and the marginal cost for each hour that the store is open to determine if Jerry should keep
it open.
Hours
Open
Total Revenue
(Total Benefit) $
Marginal
Benefit
(∆ Total Benefit)
Cost
Net Marginal Benefit/Cost $0 1 25 10
25-10 = 15 2 45 20
20-10= 10 3 60 15 5 4 70 75 –5 6 79 –6 7 81 –7
Now that one colored row should stand out after I say it. Please use a different color for the text in that row, 11

12. Net Marginal Benefit/Cost
The optimal number of hours is 4. For the 4th hour, marginal benefit equals marginal cost.
Hours
Open
Total Revenue
(Total Benefit) $
Marginal
Benefit
(∆ Total Benefit)
Cost
Net Marginal Benefit/Cost 1 25 10
25-10 = 15 2 45 20
20-10= 10 3 60 15 5 4 70 75 –5 6 79 –6 7 81 –7
Now that one colored row should stand out after I say it. Please use a different color for the text in that row, 12

13. Cleaning Your Room Your room is dirty Let’s clean it. How clean?
What are the benefits of different degrees of clean?
What is the marginal opportunity cost?

14. How Much of a particular activity?
Pursue activities as long as the marginal benefit exceeds the marginal opportunity cost
Pursue activities up to the point where: MB = MOC
If the marginal benefit of another unit of the activity is greater than the marginal opportunity cost, go for it!
If the marginal benefit of another unit of the activity is less than the marginal opportunity cost, stop!