how would you use principle of marginal analysis to make a decision.
This site uses the example of deciding what new car to buy.
http://sorrel.humboldt.edu/~economic/econ104/marginal/
To use the principle of marginal analysis to make a decision, you need to follow these steps:
1. Identify the decision you need to make: Clearly define the choice or problem you are facing. For example, determining how much of a product to produce or figuring out how many additional hours to work per week.
2. Determine the relevant variables: Identify the key factors that affect your decision. For instance, if you are deciding how much of a product to produce, relevant variables could be cost of production, demand, and revenue.
3. Analyze the marginal benefits: Assess the additional benefits you will receive from making a small change in the relevant variables. This involves identifying the benefits gained from producing or consuming one more unit of the good or service.
4. Analyze the marginal costs: Evaluate the additional costs incurred from making a small change in the relevant variables. For example, consider the additional costs of producing or consuming one more unit of the good or service.
5. Compare marginal benefits and costs: Compare the benefits and costs obtained from making incremental changes. If the marginal benefits exceed the marginal costs, it suggests a favorable decision. Conversely, if the marginal costs outweigh the marginal benefits, it indicates an unfavorable decision.
6. Make an informed decision: Based on your analysis, make a decision that maximizes your benefits or minimizes your costs. This could involve producing more, consuming less, or altering other variables to optimize your outcome.
By using the principle of marginal analysis, you consider the incremental changes rather than the total or average values. This approach allows for a more precise evaluation of the costs and benefits associated with each decision, helping you make more informed choices.