Thinking On The Margin Economics

Thinking at the margin

A key economic principle is that rational decision making requires thinking at the margin. This involves a comparing of the additional (or marginal) benefits and costs of an activeness.

An example of such rational behaviour would be deciding to drinkable ane more than beer or spending 1 more hour studying only if the additional benefits were greater than the additional costs. The optimum is where marginal benefit equals marginal price.

And this applies to firms as well. A firm maximises its profits past producing the output at which marginal revenue is equal to marginal cost.

However, a recent book by the American business guru Clayton Christensen argues that thinking in this way can exist a problem. A recent article in the Guardian describes a story he tells of the time he refused to play for his university basketball team in a national last which took place on a Sun and therefore conflicted with his religious behavior. His conclusion involved sticking to his principles rather than thinking at the margin. For him, whilst the marginal cost of sacrificing these principles but one time may well have been small compared to the resulting benefits, the eventual cost would exist much higher.

Christensen also suggests that similar arguments can apply to firm decision making. The above article provides an example he uses of decisions made by executives at the Blockbuster video chain. When smaller rivals started offering movies by mail service, Blockbuster instead connected to invest in its existing video store business model. This somewhen proved disastrous for the company. The explanation given for this is that building on previous investments fabricated more sense than setting upwards a post-order arm which would cannibalise their existing business. On the other hand, an culling explanation may be that executives at Blockbuster were irrationally allowing sunk costs to affect their determination making.

Articles

Clayton Christensen'due south "How Will Yous Measure Your Life?" Harvard Business concern School, Clayton Christensen (ix/v/12)
Dirt Christensen's life lessons BloombergBusinessweek, Bradford Wieners (three/five/12)
Bust Blockbuster goes on the block Guardian, Ben Kid (4/four/xi)

Questions

Tin you retrieve of a situation where you lot have decided to stick to your principles rather than think at the margin?
Why does a firm maximise profit by producing the output at which marginal revenue is equal to marginal toll?
What do you lot recall are the main costs of setting upwards a mail-gild business?
Are these costs mainly fixed or variable costs?
Why is it irrational to have sunk costs into account when making a decision?
Can yous think of a situation where y'all take been influenced by sunk costs?