Term Paper on "Economics Theory Popular Concept"

Term Paper 5 pages (2089 words) Sources: 5 Style: APA

[EXCERPT] . . . .

Economics Theory popular concept that is used both in macro economic theory, as well as in micro economic theory is that of marginal change. Marginal analysis is therefore one of the most important principles of economic theory, and one must study a few concepts of economic theory before one can proceed. Marginal change can be explained as a small addition or subtraction, in proportional comparison, to the total quantity of some variable. On the other hand, marginal analysis can be described as the analysis or the study of the relationships that are brought about by marginal changes, in related economic variables. As far as micro economic theory is concerned, marginal concepts are utilized primarily in order to explicate several different forms of optimizing behavior. For example, while customers are stated to be maximizing their utility or their satisfaction, companies are stated to be maximizing their profits. (Johnson, 2005)

In essence, it is often stated in economic theory that where there are only a limited number or quantity of resources available, one cannot obviously have everything that one would want, and this means that certain tough choices must be made. This can mean that every time one is forced to make a choice, something else must be given up. Economic theory on the basis of marginal theory and marginal analysis offers one a framework upon which to base one's decision: for example, the best decision can be made by effectively weighing the marginal benefits against the marginal costs involved in making an economic decision. It must be remembered that economic theory is also often based upon the philosophy of 'utilitarianism', which reiterates on the principle of "the greatest good for the greatest number." ("Marginal analysis," n. d.) This can be explained by stating that one must be able to make a decision based on the objective of maximizing societal welfare through the decision. ("Marginal analysis," n. d.)

It must be noted that although this type of choice may be easy at times, it may be extremely difficult at other times. Take for example a customer who is in the process of deciding what sort of new car he must purchase. This person would make his decision based on what he likes best, provided it stays within his fixed budget. This can mean that this customer would have maximized utility by managing to purchase the things that he likes the best. This example is a simple utilization of the utilitarian principle. At times, it may not be so easy; for example, when one is in the process of deciding an issue on healthcare. Must the elderly be denied vital health care just so that the young can avail of better health care? Similarly, must the urban children have better educational facilities, at the cost of depriving rural children of basic education? This means that the principle of the 'greatest good for the greatest number' would be directly related to how one describes and quantifies 'good', and in order to understand these ideas better, it is imperative to understand first the concepts of marginal costs and marginal benefits. ("Marginal analysis," n. d.)

Marginal costs, that is, the additional costs that are imposed when one more unit of a product is manufactured or produced can be explained by using this example: if the cost of making nine pieces of pizza is $90, and the cost of making 10 pieces is $110, then this would mean that the 'marginal cost' of producing the tenth piece of pizza is $20. This means that total costs will always increase whenever production increases, although marginal costs may not rise at the same time. When marginal costs rise, it can be explained with an example: when a firm becomes very large, the costs rise, at the same time that the difficulties of managing the organization increase. It can be further explained by another example: when a mandate is passed that the air and the environment must become cleaner, the task is quite simple and easy at the outset, because the dirtiest cars can be pulled off the roads. However, after this task has been accomplished, the mission becomes more and more difficult, and newer technology may be needed to continue the process. Therefore, it is obvious that marginal costs would rise. Marginal benefits, on the other hand, can be explained as the marginal benefits or advantages that one would obtain when one more unit is produced. These benefits can be expressed in two manners: units of utility, or satisfaction with the product. ("Marginal analysis," n. d.)

Therefore, it is obvious that economic choice in general almost always involves some sort of adjustment to the already existing situation, or the status quo. For example, the manager of a school may be trying to decide whether he must hire a new teacher for English, or not, or, an individual, after having finished his dinner at a restaurant, may decide whether he wishes to have dessert or not. This explains the theory that economic choice is almost always based on a comparison of the expected marginal benefits and the expected marginal costs of the choice under consideration at that particular point of time, a choice that would change the present situation, for better or for worse. (McEachern, 2006)

As mentioned earlier, in a world of scarcity, with the limited choices and options available to an individual or a group, the decision to obtain marginal utility or benefits within the process of making a choice can be very important indeed. However, one surprising element that has arisen out of the study and analysis of decisions based on marginal analysis is that there can actually be 'too much of a good thing'. (McConnell; Brue, 2005) for example, services like health care or education appear to be inherently desirable to an individual or association, but at the same time, it is a fact that too much of these services may be produced. The idea of 'too much' occurs when one is able to obtain additional amounts of the services at a rate that may exceed the marginal costs, even though it may be true that the marginal benefits may exceed them. This can mean that one is in the process sacrificing alternative goods and services that may have been available at the margin, that is, in other words, the place at which one considers the final lists of a product or service. (McConnell; Brue, 2005)

It can be stated therefore, that marginal analysis can be used to help people to allocate their scarce resources in such a way that they would be able to maximize the output, or in other words, greatly enhance the value that they may have hoped to produce or obtain. In this context, marginal analysis, a technique widely and popularly used in making wise and practical business decisions, can be explained as the analysis of the benefits and the costs of the marginal unit of a good, or of an input, for example, "margin = next unit, while net benefits = total benefits - total costs." ("Marginal analysis, a key to economic analysis," n. d.) in this situation, it is obvious that most individuals would wish to make the maximum net benefits. The control variable, an important component in a marginal analysis theory, is the variable that can be changed as required. For example, the control variable may be the quantity of a good that one buys, or it may be the quantity of the output that one would be able to produce, or it may refer to the quantity of an input that one uses in order to produce the output. Marginal analysis in this context concentrates on the aspect of whether or not one must take the risk of increasing the control variable by one single unit or not. ("Marginal analysis, a key to economic analysis," n. d.)

Experts define the process in which to conduct an effective and efficient marginal analysis: first and foremost, it is important to define the control variable involved. Second, one must identify what the increase in the total benefits would become, if one were to add one more unit of the control variable. This can be explained as the 'marginal benefit' of the added unit. Third, one must be able to determine what the increase in the total cost would be, if one were to add one more unit of the control variable. This would comprise the 'marginal cost' of the newly added unit. Fourth, if it were found that this unit's marginal benefits were to exceed or at the very least, to equal its marginal costs, then it must be added. ("Marginal analysis, a key to economic analysis," n. d.)

One may be able to apply economic theories of marginal costs and marginal benefits in a practical manner to a typical consumer purchase decision making process. At the outset, it must be remembered that a consumer makes several types of economic decisions on a daily basis, in which he makes decisions on… READ MORE

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