Marginal Benefits And Marginal Costs

Topics: Economics, Costs, Marginal cost Pages: 5 (687 words) Published: April 27, 2015
Luis D. Maymí Romero
University of Phoenix
Prof. Mayra Malpica Rivera
April 27, 2015
There are four principals of decision making:
People face trade-off
The cost of something is what you give up to get it
Rational people think at the margin
People respond to incentives
The first principle can be summarized with the following phrase “There’s never a free lunch” every time that you need something you have to give something in return. One example is an employee that needs a particular day off. He could just miss work and not get paid or ask for a change of schedule and not miss work. This allows flexibility or compromise between parties. Previous to making any decisions on the trade off you should always consider the cost. At times the cost of some actions may not be apparent at a glance. The cost of any given project may reflect on the outcome of your decision. Never assume that everybody is rational. Rational people rarely decide in black and white but for the most part their decisions are in the gray area. As you go deeper into economics, you will encounter firms that decide how many workers to hire and how much of their product to manufacture and sell to maximize profits. Incentives, who doesn’t like a positive incentives? Keep in mind that if there is positive incentive there can also be negative ones. Rational people will always keep in mind the cost and benefits of a project and they will respond to the incentives provided for the completions of given task. An example of marginal benefits and the marginal costs of consider an airline deciding how much to charge passengers who fly standby. Suppose that flying a 200 - passenger plane across the United States costs the airline $100,000. In this case, the average cost of each seat is $100,000/200, which is $500. One might be tempted to conclude that the airline should never sell a ticket for less than $500. In fact, however, the airline can raise its profits by thinking at the margin. Imagine that a plane is about to take off with ten empty seats, and a standby passenger waiting at the gate will pay $300 for a seat. The airline in this example will ask itself should I sell the remaining seats at the cost of $300 per passenger is cost effective. The answer is yes it will be profitable to sell the remaining seat at this price. While the passenger pays more than the marginal cost of the seat. An incentive that could lead to another decision would be a rival airline providing the same trip for less or the same price. Persons are prone to incentives if you provide them with monetary, treatment or any other benefits that will reward them for their efforts. The fundamental lessons about the economy as a whole are that productivity is the ultimate source of living standards, that money growth is the ultimate source of inflation, and that society faces a short-run trade-off between inflation and unemployment. In a market economy, the decisions of a government are replaced by the decisions of companies and individuals. Companies decide how many people to hire and what product to manufacture. Individuals decide which industries to work for and what items to buy with their salaries. A centrally planned economy is when a government decides what items to produce and how much. Determine the allocation of scarce resources and who will produce and consume these goods and services. When the market economy and the centrally planned economy are combined and influenced by the control of the private and government sector.

In conclusion economics play an intrical part of our daily lives. It allows a country to grow or a company to sink. Decicion making is an important aspect of the economy and all decicions regarding this subject has to be treated as a delicate topic.

Gregory, N. (2009). Principles of Economics (5th ed.). Mason, Oh: South-Western Cengage Learning. Hubbard, R. & O’Brien, A....

References: Gregory, N. (2009). Principles of Economics (5th ed.). Mason, Oh: South-Western Cengage Learning.
Hubbard, R. & O’Brien, A. (2010). Economics (3rd ed.). Boston, MA: Pearson Hall.
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