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Economic Fundamentals: Thinking at the Margin

Capítulo 3

Estimated reading time: 7 minutes

Marginal Reasoning: Decisions as “Small Changes”

Many real decisions are not “all or nothing.” You usually decide whether to do a little more or a little less: one more hour, one more item, one more worker, one more feature. Marginal reasoning is the habit of evaluating these small changes rather than comparing big totals or averages. It predicts behavior well because people typically adjust at the edges: they keep going until the next step is no longer worth it.

Total vs. Marginal: What’s the Difference?

Total benefit is the overall gain from doing an activity at some level (e.g., studying 4 hours total). Marginal benefit is the extra gain from doing one more unit (e.g., the 5th hour of studying). Similarly, total cost is the overall cost at that level, while marginal cost is the extra cost of the next unit.

In symbols (informal but useful):

Marginal benefit (MB) = change in total benefit from +1 unit
Marginal cost (MC) = change in total cost from +1 unit

Marginal values often change as you do more of something. A common pattern is:

Diminishing marginal benefit: each additional unit helps, but by less than the previous one.
Increasing marginal cost: each additional unit costs more (fatigue, overtime pay, congestion, etc.).

Why Marginal Beats Average

Average comparisons can hide what matters for the next step. Suppose your average score improvement per hour of studying is “good,” but the next hour might add very little because you are tired. Or your average cost per cookie might be low, but the next cookie could make you feel sick. People stop (or continue) based on the next unit, not the average.

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Example of the average trap:

You studied 4 hours and improved your practice score by 20 points total. Average = 5 points per hour.
But if the 5th hour adds only 1 point (marginal benefit = 1), you might stop even though the average still looks strong.

Intuitive Examples of Marginal Benefit and Marginal Cost

One More Hour of Studying

Total benefit: your overall learning or score improvement after a certain number of hours.

Marginal benefit: how much the next hour improves your understanding or score.

Marginal cost: what you give up or endure for that next hour (fatigue, lost sleep, less time for exercise, lower focus tomorrow). Even if you enjoy studying, the marginal cost can rise as you get tired.

Marginal reasoning question: “Is the next hour worth it?” not “Was studying worth it overall?”

One More Cookie

Marginal benefit might start high (it tastes great) and then fall (you’re less hungry, taste satisfaction fades). Marginal cost might rise (feeling too full, sugar crash, regret, stomach discomfort).

Marginal reasoning question: “Will I enjoy the next cookie enough to justify its downsides?”

One More Worker

Imagine a small shop deciding whether to hire an additional worker.

Marginal benefit: extra output or extra sales made possible by one more worker (shorter lines, more customers served, faster restocking).
Marginal cost: the wage and any extra costs (training time, scheduling complexity, workspace crowding).

Often, the first few workers add a lot because tasks can be divided efficiently. Later, adding another worker may help less if the shop becomes crowded or there isn’t enough equipment, so marginal benefit can fall.

The Step-by-Step Decision Rule

Rule: Do the Next Unit if MB ≥ MC

The core marginal decision rule is:

Take the next step (one more unit) if marginal benefit ≥ marginal cost.

Interpretation:

If MB > MC, the next unit adds more benefit than cost, so it increases your net gain.
If MB = MC, you are right at the boundary; taking it or not taking it leaves you about the same.
If MB < MC, the next unit costs more than it benefits, so you should stop (or not start that unit).

How to Apply It (Practical Steps)

Define the “unit.” Make it small and repeatable (one hour, one cookie, one worker, one extra practice set).
Estimate MB for the next unit. Ask: “What extra good comes from just one more?”
Estimate MC for the next unit. Ask: “What extra downside or extra resources does just one more require?”
Compare MB and MC. If MB ≥ MC, do it; if MB < MC, stop.
Re-check after each unit. MB and MC can change as you continue.

A useful mental shortcut: keep going until the next unit is not worth it.

Activity 1: Choose the Best Stopping Point (Studying)

Suppose you are deciding how many hours to study tonight. The table shows the marginal benefit (extra points on a practice quiz) and marginal cost (extra “cost points” representing tiredness and lost time). Your goal is to choose the number of hours where you should stop.

Hour (next hour)	Marginal Benefit (MB)	Marginal Cost (MC)
1	8	2
2	6	3
3	4	4
4	2	5

Task

For each hour, decide: study that hour? (Yes if MB ≥ MC)
Identify the optimal stopping point (the last hour you should study).

Check Your Reasoning

Hour 1: MB 8 ≥ MC 2 → do it
Hour 2: MB 6 ≥ MC 3 → do it
Hour 3: MB 4 ≥ MC 4 → do it (boundary)
Hour 4: MB 2 < MC 5 → stop before this hour

Optimal choice: study 3 hours. The 3rd hour is the last one where MB is at least as large as MC.

Activity 2: Choose the Best Stopping Point (Cookies)

You are at a party deciding whether to eat another cookie. MB is your extra enjoyment; MC is the extra downside (feeling too full, sugar crash, etc.).

Cookie (next cookie)	MB	MC
1	7	1
2	5	2
3	3	3
4	2	4

Task

Using MB ≥ MC, decide how many cookies to eat.

Check Your Reasoning

Cookie 1: 7 ≥ 1 → eat it
Cookie 2: 5 ≥ 2 → eat it
Cookie 3: 3 ≥ 3 → eat it (boundary)
Cookie 4: 2 < 4 → stop before this cookie

Optimal choice: eat 3 cookies.

Activity 3: Choose the Best Stopping Point (Hiring)

A manager is considering hiring workers one at a time. MB is the extra value of output (or extra profit contribution) from one more worker; MC is the wage cost of that worker.

Worker (next hire)	MB	MC
1	120	80
2	110	80
3	90	80
4	70	80

Task

Which workers should be hired?
At what point should hiring stop?

Check Your Reasoning

Hire worker 1: 120 ≥ 80 → yes
Hire worker 2: 110 ≥ 80 → yes
Hire worker 3: 90 ≥ 80 → yes
Hire worker 4: 70 < 80 → no

Optimal choice: hire 3 workers.

Common Interpretation Mistakes (and Fixes)

Mistake 1: Using Totals to Decide the Next Step

Problem: “Studying has helped a lot overall, so one more hour must be good.”

Fix: Ask about the next hour: “What does hour 5 add, and what does it cost?” Totals can be positive while the next unit is not worth it.

Mistake 2: Using Averages Instead of Margins

Problem: “On average, each cookie has been enjoyable, so another one is fine.”

Fix: The average enjoyment can stay high even when the next cookie’s enjoyment is low. Decide with MB vs. MC for the next cookie.

Mistake 3: Forgetting That MC Can Rise

Problem: Assuming the cost of each additional unit is constant (energy, time, congestion, mistakes).

Fix: Re-estimate MC as you go. The “next unit” can be more expensive than earlier units.

Quick Practice: Identify MB and MC in Everyday Choices

Streaming one more episode: MB = extra enjoyment/relaxation; MC = lost sleep, less time tomorrow, reduced focus.
Adding one more feature to a project: MB = improved user value; MC = extra development time, bugs, delays.
Driving one more mile to a cheaper store: MB = savings; MC = fuel, time, hassle.

In each case, the marginal question is: Is the next unit worth it?

Now answer the exercise about the content:

Using the marginal decision rule (MB ≥ MC), how many hours should you study if the next hour has MB=4 and MC=4, but the following hour has MB=2 and MC=5?

You are right! Congratulations, now go to the next page

You missed! Try again.

Keep taking the next unit as long as MB ≥ MC. The hour with MB=4 and MC=4 is still worth doing (boundary), but the next hour has MB=2 < MC=5, so you stop before it.