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Hello Everyone, this is my Padlet where I discuss the topic of Opportunity Cost, Marginal Thinking and Incentives and how it relates to different aspects of everyone's life.

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In a simple scenario, this video explains what you have to give up(opportunity cost) in order to get what you want relative to different scenarios. This also explains the marginal costs which is the cost to produce "one" more unit (opportunity your giving up).

I chose this video due to the simplicity of how they explain this concept. Khan also has a graph on the right-hand side of video showing the scenario situations and how they relate to each other (the Production Possibility Frontier).

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Incentives and disincentives can be various rewards or punishments with doing a behaviour. They can induce behavioural changes, but truly depends on the persons choice at the end. A very common incentive is the price of a good or service. A rising price will deter some buyers while a falling price will attract more buyers. Slightest changes in price can change a persons choice. I like this article because of it's analogies. For example, incentives can be compared to holding a carrot in front of a donkeys face to make them move forward, and the disincentive of this would be hitting the donkeys rump to make them stop in place.

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Introduction

Incentives sounds like a topic to discuss in a pyschology class rather than an economics class. However, incentives are fundamental to economic behavior. In economics, incentives matter. You won't be able to understand economics without understanding incentives and disincentives.

Incentives affect our daily lives in many ways. A famous example is the allegory that if you hold a carrot in front of a donkey-offering it an incentive to move forward-and also thwack its rump with a stick-offering a disincentive to stand still-then likely it will start walking forward. Parents typically offer both rewards and punishments to encourage good behavior and discourage bad behavior by their children.

In economics, incentives may involve either cultural norms, or financial rewards and punishments. Cultural norms may offer incentives by rewarding with social acclaim those who help the needy, or may offer disincentives by punishing those who engage in theft. Financial incentives may involve offering financial prizes or financial fines for good or bad behavior, or often just a change in a price that ends up with your having to spend more or less for what you want to sell or buy.

Incentives and disincentives are not guarantees of behavioral changes. But, they tend to induce behavioral changes by choice rather than by force or immutable decree. Your parents can tell you that you are forbidden to text your friends after 8 p.m. and if you do it, they'll take away your cell phone for a month. Or, they can dock your allowance by $1 per text message after 8 p.m. Either kind of incentive structure may grate on you; but it will likely change your behavior at least a small bit-or, as economists often say, at the margin.

The most common economic incentive is something we take for granted every day: Prices are incentives.

For example, a rise in the price of any good is an incentive for us to back off from buying it as much as we used to. Perhaps we'll buy a different good instead. So, for example, a rise in the price of butter creates an incentive to buy less butter. Maybe we'll buy margerine instead. Or maybe we'll use butter more sparingly and simply buy it less frequently. Or, if I'm a baker, maybe I won't change my use of butter directly, but I'll cut back on buying something else to be able to keep buying butter. No matter what, though, the change in the price of butter creates an incentive for me to change my behavior-my economic behavior.

And buyers are not the only ones affected by and with revised incentives in the fact of a price change. If I raise dairy cows and sell them for milk, a rise in the price of butter may give me an incentive to breed more cows or sell more raw milk to butter producers who are willing to pay more than they used to, what with the increased price of butter they are receiving. I may even have an incentive to change the seed I plant so as to encourage my cows to produce milk more conducive to butter production.

The moral is that every price change entails incentives for almost everyone in the economy. Though you may not think about it a lot, you probably make a lot of decisions every day that involve responding to your ever-changing personal incentives. Incentives matter, not only in your personal decisions but also across a whole economy, because often those incentives result in similar choices which accumulate across many individuals.

Taxes change prices. Thus, a change in tax rates affects incentives. Some economists argue that taxes should in fact be used with the express purpose of changing behavior. For example, if a government decides it does not want its citizens to use plastic straws, it can do that by publicizing the ill effects of plastic straw use, or by forbidding the use of plastic straws, or by taxing the use of plastic straws. Taxing the use of plastic straws, while it does not guarantee that there will be less use of plastic straws, does allow both buyers and sellers a degree of choice. Families with handicapped children who need straws to drink at restaurants may still be able to find restaurants that offer paper straws. Restaurants that cater to traveling truck and car drivers who rely on straws to sip drinks while they drive can still decide what to do to serve their clientele.

Incentives matter. If you make decisions without thinking about your personal incentives, let us know.

Definitions and Basics

Incentives Matter, by Russ Roberts at Econlib

Incentives matter. The most famous example in economics is the idea of the demand curve-when something gets more expensive, people buy less of it. When it gets less expensive, people buy more of it....

Demand, from the Concise Encyclopedia of Economics

The main reason economists believe so strongly in the law of demand is that it is so plausible, even to noneconomists. Indeed, the law of demand is ingrained in our way of thinking about everyday things. Shoppers buy more strawberries when they are in season and the price is low. This is evidence for the law of demand: only at the lower, in-season price are consumers willing to buy the higher amount available. Similarly, when people learn that frost will strike orange groves in Florida, they know that the price of orange juice will rise. The price rises in order to reduce the amount demanded to the smaller amount available because of the frost. This is the law of demand. We see the same point every day in countless ways. No one thinks, for example, that the way to sell a house that has been languishing on the market is to raise the asking price. Again, this shows an implicit awareness of the law of demand: the number of potential buyers for any given house varies inversely with the asking price....

What Motivates Us?, a LearnLiberty video.

Prof. Mario Villarreal-Diaz discusses how incentives alter the behavior of unique individuals.

The Power of Incentives, by Dwight Lee. At CommonSenseEconomics.com, originally from The Freeman.

The surest way to get people to behave in desirable ways is to reward them for doing so-in other words provide them with incentives. This is so obvious that you might think it hardly deserves mention. But it does.

You might say that people shouldn't have to be rewarded (bribed) to do desirable things. Even when you acknowledge that incentives are necessary, it is not obvious how to establish the ones that motivate desirable action.

In one of my classes, I recently encountered the emotional resistance some people have to using incentives to accomplish good things. I was pointing out that the elephant populations in Zimbabwe and South Africa were expanding because policies there allow people to profit from maintaining elephant herds. A student who had stressed his environmental sensitivity responded that he would rather not see the elephant saved if the only way to do so was by relying on people's greed. In other words, he was willing to stand on principle as long as only the elephants suffered the consequences. His principle, one that I suspect was shared by others in the class, was that good things should be motivated by compassion and concern, not self-interest....

Incentives, Incentives, Incentives, by Allen R. Sanderson at Econlib

If we're dissatisfied with a particular activity or outcome, or want to modify some behavior, seeing the underlying incentives and finding a way to change them can often produce a more desirable result. And this might entail understanding who profits most, or suffers the consequences most directly, from one's actions, and how to (re)align the incentive structures....

In the News and Examples

Life-Saving Incentives: Consequences, costs and solutions to the organ shortage, by Alex Tabarrok at Econlib

Our current organ procurement system relies solely on altruism to motivate donation. Altruism is a fine thing but it is in short supply....

Incentives in sports:
Michael Lewis on the Hidden Economics of Baseball and Football

Michael Lewis talks about the economics of sports-the financial and decision-making side of baseball and football-using the insights from his bestselling books on baseball and football: Moneyball and The Blind Side. Along the way he discusses the implications of Moneyball for the movie business and other industries, the peculiar ways that Moneyball influenced the strategies of baseball teams, the corruption of college football, and the challenge and tragedy of kids who live on the streets with little education or prospects for success....

Slavery, Snakes, and Switching: The Role of Incentives in Creating Unintended Consequences, by Glen Whitman at Econlib

In the developed world, we like to think of slavery as a bad memory. But slavery persists to this day, particularly in some parts of Africa, most notably the Sudan. Raiding parties steal children from their home villages and transport them for sale in slave markets many miles away. In the 1990s, when news of this ongoing tragedy came to the developed world, well-intentioned people formed charitable foundations that raised money for slave redemption-that is, buying people out of slavery.

Did these charitable efforts do any good? Certainly, some people are free now who might otherwise of have lived their whole lives in slavery. But there is strong evidence to suggest that slave redemption made the overall situation worse. As journalist Richard Miniter reported in a 1999 article in the Atlantic Monthly, the high prices offered by relatively rich Americans increased the demand for slaves, turned the slave trade into an even more lucrative business, and thereby gave raiders an incentive to conduct even more slave raids. If not for the activities of Western charitable organizations, many of the redeemed slaves might never have been enslaved in the first place!...

Pete Boettke on Katrina and the Economics of Disaster. Podcast episode on EconTalk

Pete Boettke of George Mason University talks about the role of government and voluntary efforts in relieving suffering during and after a crisis such as Katrina. Drawing on field research he is directing into the aftermath of Hurricane Katrina, Boettke highlights the role of what he calls "civil society"-the informal, voluntary associations we make as individuals with each other to create community....

Incentives and disincentives of tenure:
The Economics of the Tenure System

, by Jeffrey A. Miron. Econlib, September 24, 2001.

Tenure plays a valuable role in the operation of most colleges and universities, but for a reason quite different from those usually advanced in its defense.

A military draft creates different incentives from an all-volunteer army for a government:
Volunteers of America: Lessons from the New Contract Army

, by Fred S. McChesney. Econlib, July 4, 2005.

Being forced to rely on volunteers alters completely the way in which politicians and bureaucrats have to think about warfare in the first place. Economics predicts that the need to hire soldiers changes the incentives facing politicians to commit America to war....

It is highly unlikely that Vietnam would have happened without conscription. Not enough men would have enlisted voluntarily at the going wage. As the saying at the time went, "What if they held a war and nobody came?" Of course, wages could have been raised sufficiently, but the cost would have been astronomical...

Incentives provided by parents:
Parent-onomics 101 Can Economics Help You Be a Better Parent?

Turns out Mr. Jones was providing just a bit too much help with homework-thereby diluting his son's work incentives. There's a name for this in economics: it's called "crowding out," and it applies generically to any situation where outside help merely supplants private efforts to solve a problem: be it social security and retirement savings, welfare payments and work effort, or public safety nets and charitable giving....

I think economic principles have a lot to offer parents. Parents hold considerable sway over their kids. Maybe not as much as they like, but nonetheless: what parents do affects their child's incentives. And the main take-home message of economics is that incentives matter. (Plus, even the word "economics" comes from the Greek oikonomia, or "housekeeping." How appropriate is that for the quotidian life of kid management?)

Incentives matter for growth and ideas throughout the world:
An Interview with Paul Romer on Economic Growth

, with accompanying EconTalk podcast episode:

Paul Romer on Growth

We have things like universities, and we have things like patent laws, and we have things like research grants which have created incentives for those individuals to engage in more discovery. The institutions-again, the rules of the game-create incentives. And we've found ways to create incentives for people to do more discovery. So a meta-idea would be something like the modern research university....

The Power of Incentives, by Dwight Lee. At FEE.org, originally from The Freeman

The surest way to get people to behave in desirable ways is to reward them for doing so-in other words provide them with incentives. This is so obvious that you might think it hardly deserves mention. But it does.

A Little History: Primary Sources and References

Population and birth control: Economic incentives are what prevent population from outstripping the food supply.
Happiness, Progress and the "Vanity of the Philosopher" (Part 2): The Trial of Annie Besant and Charles Bradlaugh

, by Sandra J. Peart, David M. Levy. Econlib, December 5, 2005.

The popular interpretation of Malthusian population theory is one of inexorable tragedy-population will inevitably outstrip the food supply leading to famine and death. This caricature of Thomas Robert Malthus neglects his view that individuals could make choices to avoid tragedy, using their uniquely human gifts of foresight and calculation.

Even though Malthus was aware of the sexual temptation associated with an unmarried state, Malthus advocated delay of marriage to prudentially restrain population....

Of the general Checks to Population, and the Mode of their Operation, by Thomas Robert Malthus. Book I, Chapter 2 in An Essay on the Principle of Population.

These checks to population, which are constantly operating with more or less force in every society, and keep down the number to the level of the means of subsistence, may be classed under two general heads-the preventive, and the positive checks.

The preventive check, as far as it is voluntary, is peculiar to man, and arises from that distinctive superiority in his reasoning faculties, which enables him to calculate distant consequences. The checks to the indefinite increase of plants and irrational animals are all either positive, or, if preventive, involuntary. But man cannot look around him, and see the distress which frequently presses upon those who have large families; he cannot contemplate his present possessions or earnings, which he now nearly consumes himself, and calculate the amount of each share, when with very little addition they must be divided, perhaps, among seven or eight, without feeling a doubt whether, if he follow the bent of his inclinations, he may be able to support the offspring which he will probably bring into the world.... Will he not lower his rank in life, and be obliged to give up in great measure his former habits? Does any mode of employment present itself by which he may reasonably hope to maintain a family? Will he not at any rate subject himself to greater difficulties, and more severe labour, than in his single state? Will he not be unable to transmit to his children the same advantages of education and improvement that he had himself possessed?... [pars. I.II.3-4]

Self-interest vs. benevolence as incentives:
An Inquiry into the Nature and Causes of the Wealth of Nations

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.... [par. I.2.2]

The size of incentives in economics can be estimated:
Principles of Economics

The advantage which economics has over other branches of social science appears then to arise from the fact that its special field of work gives rather larger opportunities for exact methods than any other branch. It concerns itself chiefly with those desires, aspirations and other affections of human nature, the outward manifestations of which appear as incentives to action in such a form that the force or quantity of the incentives can be estimated and measured with some approach to accuracy; and which therefore are in some degree amenable to treatment by scientific machinery. An opening is made for the methods and the tests of science as soon as the force of a person's motives- not the motives themselves-can be approximately measured by the sum of money, which he will just give up in order to secure a desired satisfaction; or again by the sum which is just required to induce him to undergo a certain fatigue.... [par. I.II.2]

Advanced Resources

Incentives in the law
Law and Economics Concise Encyclopedia of Economics

The second characteristic of law and economics is its emphasis on incentives and people's responses to these incentives. For example, the purpose of damage payments in accident (tort) law is not to compensate injured parties, but rather to provide an incentive for potential injurers to take efficient (cost-justified) precautions to avoid causing the accident. Law and economics shares with other branches of economics the assumption that individuals are rational and respond to incentives. When penalties for an action increase, people will undertake less of that action. Law and economics is more likely than other branches of legal analysis to use empirical or statistical methods to measure these responses to incentives.

Elephants, ivory, property rights, village ownership, interest groups.
Incentives and Institutions

Economics professor Howie Baetjer of Towson University discusses how institutions, both public and private, affect the incentives that individuals face. These incentives impact the issues people care about, such as wildlife conservation.

Profit incentives for entrepreneurs in Austrian economic theory.
Equilibrium versus Market Process The Foundations of Modern Austrian Economics

The Austrian concept of the entrepreneurial role emphasizes profit as being the prime objective of the market process. As such it has important implications for the analysis of entrepreneurship in nonmarket contexts (such as within firms or under socialism or in bureaucracies in general). I have already remarked that we do not know precisely how entrepreneurs experience superior foresight, but we do know, at least in a general way, that entrepreneurial alertness is stimulated by the lure of profits. Alertness to an opportunity rests on the attractiveness of that opportunity and on its ability to be grasped once it has been perceived. This incentive is different from the incentives present in a Robbinsian world. In the nonentrepreneurial context, the incentive is constituted by the satisfactions obtainable at the expense of the relevant sacrifices. Robbinsian incentives are communicated to others by simply arranging that the satisfactions offered to them are more significant (from their point of view) than the sacrifices demanded from them. Incentive is thereby provided by the comparison of known alternatives. In the entrepreneurial context, however, the incentive to be alert to a future opportunity is quite different from the incentive to trade off already known opportunities; in fact it has nothing to do with the comparison of alternatives. No prior choice is involved in perceiving an opportunity waiting to be noticed. The incentive is to try to get something for nothing, if only one can see what it is that can be done.

Related Topics

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Introduction Incentives sounds like a topic to discuss in a pyschology class rather than an economics class. However, incentives are fundamental to economic behavior. In economics, incentives matter. You won't be able to understand economics without understanding incentives and disincentives. Incentives affect our daily lives in many ways.

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There is a cost to every action we decide to take. This video illustrates some very relatable real world examples of the different choices a person makes and what may be the forgone opportunities of the associated outcomes. It also goes over why some people may give up more money as an opportunity cost, stating that a lot of the time it isn't the main driving factor in many peoples choices. The "psychic profit" could also be the most appealing choice, in which some one chooses personal happiness, others recognition, etc. The "cost" of an action isn't always measured in monetary value, but a more meaningful/personal feeling.

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Question #1: What did you learn about your topic that surprised you the most?

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Question #1: What did you learn about your topic that surprised you the most?

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The slightest change in a products price can be caused by a variety of things you wouldn't imagine, and how those changes can affect our decision making.

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Question #2: Provide a real-life example of how this topic is relevant or interesting for you.

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Question #2: Provide a real-life example of how this topic is relevant or interesting for you.

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Picking which program should I enrol into and whether I should go to college or not. I chose a program that is really fulfilling to my interests, but the opportunity cost of another program that may pay better in the future. I could have also worked the two years since I started college and gained a lot of money, but I instead gained a lot of connections in my chosen field and grew a lot as a person.

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Question #3: If you could pass on your knowledge to a family member or friend, what do you think is the most important thing to pass on?

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Question #3: If you could pass on your knowledge to a family member or friend, what do you think is the most important thing to pass on?

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I would say that there are a lot of things to think of when deciding on a decision. Sacrifices are unavoidable and you must pick a choice where you would have the least amount of regret.

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The marginal cost and benefit from the consumption of the next good/service.

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Are diamonds more valuable than water? or is it the other way around? In this video it explains why we value somethings in society over others. Water has many benefits to the world and us humans, and without it, we cannot survive. Now comparing water to diamonds, diamonds are basically useless in the grand scheme of things. The reason why diamonds are much more expensive than water is that it is less abundant. This scarcity creates value, but it is very situational oriented. If you were in a desert on the brink of dehydration, you would value water over diamonds. This is a simple. I really liked the simple analogy it uses to convey this topic.

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Essential Austrian Economics: Marginal Thinking

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This video explains the incentive theory in an understandable manner. People preform a behaviour due to a positive meaning associated with it. One example they use is a football team trying hard in practice(behaviour) because they want to win the Superbowl(positive). The "positive meaning" must be attainable to maintain a level of motivation to do the behaviour. Positive reinforcement is whats needed to consistently do this behaviour for the long-term. I chose this video because it compares different examples of how incentives can influence someone and how they all relate in a simple graphic. This is a great foundational video for students to relate to when learning more complex topics.

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Incentive theory | Behavior | MCAT | Khan Academy

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Opportunity Cost From a Business Perspective

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Opportunity Cost From a Business Perspective

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Every decision a business makes, it is losing opportunities somewhere else (opportunity cost). Weighing out the opportunity costs of different options is an important part of the decision making process. Opportunity cost is calculated  from subtracting the return on option not chosen by the return on option chosen. The return may not only be calculated as a dollar amount that directly affect cash flow and profitability (Explicit costs), but as energy and time which don't have a fixed monetary value that a company can track (Implicit costs). There are also two profits as well, which can be defined as subtracting total explicit costs from total business revenue (Accounting profits), and total revenue subtracted by explicit & implicit costs (Economic profit).

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Opportunity cost is incurred when a business chooses one option over another. Calculate this amount beforehand to help select the most profitable option.

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We continuously make decisions that weigh out the opportunity costs, this is intensified by being a collegiate athlete. Each play run has an opportunity cost of not executing others, which can be the deciding factor of wining or losing. Outside of actually playing the sport, student athletes have to make other important decisions that have big opportunity costs. An example would be having to choose to be a poorly paid minor-league athlete, or staying in college with no income but access to college education. I like this article because it brings the perspective of an athlete and how he had to deal with opportunity costs all the time. This shows that opportunity costs relate to all of our lives in some way.

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I was fortunate to have lived a life up to this point where I have been surrounded with good people that genuinely had my best interest in mind. These people came in the form of family, coaches, teammates, and people I met along the journey.

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Weighing Out Opportunity Cost (Risk vs. Instant Reward)

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Weighing Out Opportunity Cost (Risk vs. Instant Reward)

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This shows the the risk and reward when weighing an opportunity. It is up to the person to decide what to be the best option in their current situation. Most of the time, the more risk will mean the greater reward, but not all the time which may make the decision process easier.

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Thinking about the next steps and what it can do for you instead of the past is marginalized thinking. If you take better care of your garden for an extra hour, you'll get 12 more tomatoes, which is the marginal product of labour (1 hour). You can also get the marginal cost by dividing the amount of tomatoes by an hour in minutes (12/60=5). The marginal cost of gaining 1 tomato is 5 minutes. This sort of thinking is looking at the long term result rather than the short term. What do you have to do/sacrifice in order to sell/produce one more product.

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Introduction

What does it mean to think at the margin? It means to think about your next step forward. The word "marginal" means "additional." The first glass of lemonade on a hot day quenches your thirst, but the next glass, maybe not so much. If you think at the margin, you are thinking about what the next or additional action means for you.

How many additional tomatoes can you get by taking better care of your garden? If an hour extra work weeding means you will get 12 more tomatoes, then one additional hour of work results in 12 additional tomatoes. Economists sometimes summarize that by saying your marginal product of labor is 12. That just means you can get 12 more tomatoes for one additional hour of work.

On the flip side of that, you could equally well say that the marginal cost of a producing one additional tomato is 5 additional minutes (1/12th of an hour) of your labor. Every new tomato costs you another five minutes of weeding. As another example, if one additional Facebook friend costs you an additional 10 minutes of attention, then the marginal cost is 10 minutes of your time per new Facebook friend.

A bus that is half-empty can take on more riders with zero or very little extra cost-perhaps just a few cents more for wear and tear and the cost of gas to haul an extra 150 pounds. Economists would say the marginal cost of an additional rider is nearly zero. But, if buses are always running packed with lines left standing, then the marginal cost of additional riders would be the entire cost of adding another bus. It is very common to have to compare different marginal costs for different scenarios in order to decide which alternative to pursue.

When you drive around the block to park your car for a concert or event, you can keep driving around the block waiting for that perfect, free, on-street parking spot to come available. Or, you can weigh the alternative of spending $10 for a paid parking lot spot. What matters is what you do in the next minute, ten minutes, hour, or day. The marginal cost of finding a parking space could be only $10; or it could be another hour of driving around hoping for a free spot to open up just as you are in position to grab it. If you already spent an hour searching for a great parking spot, you may well do better to let that memory go. Thinking at the margin means to let the past go and to think forward to the next hour, day, year, or dollar that you expend in time or money. What's better for you now or in the next few minutes? If you think at the margin, you are thinking ahead. At some point, if you continue to drive around the block again and again with no results, an economist would encourage you to think about the future instead of bulleting on the past. You can't change the past, but you can change what you do next. (Economists sometimes summarize this by saying, "Sunk costs are sunk.") And in what you do next, you should weigh the costs and benefits starting afresh for the next few minutes of your time-which is what economists mean when they say, "Think at the margin." At the margin, you could get a parking spot for $10 or you could drive around and maybe get a parking spot for free with a probability of, say, 20% in the next hour. Thinking at the margin means weighing those future options, and not focusing on what you did in the previous hour of frustrating circling around.

The marginal cost of producing computer chips is the entire cost of producing one more computer chip. Producing only one more from your existing equipment and workers may entail only a small cost that is only an additional few pennies per chip. But if you are already maxing out your production, producing even one more may entail producing a hundred thousand more. Which in turn may entail building a new factory and hiring all its workers, or even researching a whole new way to produce chips-perhaps an additional hundred thousand dollars, at an average cost of a dollar per additional chip or even an additional few million dollars. You have to consider all the additional costs for each option before making a decision. Maybe to get just one more chip you still have to pay extra to hire an extra worker to work the night shift, plus hire someone to stand by to do a little more machine maintenance. Maybe paying more overtime for even one more worker will mean paying higher taxes or insurance fees, or will entail more explanations to other workers about why you can't offer full opportunities for the extra opportunities to everyone. The sum of all those additional costs-from wages to insurance to taxes to emotional burdens and effects on morale-to produce one more computer chip is what economists mean by the marginal cost of a computer chip. You can't add apples to oranges, so you may have to weigh the various costs in different dimensions. See Real, Relative, and Nominal Prices and What is Economics?

On a hot day, that first blast of cold air as you step into an air conditioned store gives you a tremendous boost. Each succeeding few minutes, though, may give you less pleasure. Economists say your marginal pleasure or marginal utility-your marginal benefit- diminishes as you experience more.

The word "marginal" in common speech or layman's use sometimes refers to an iffy project. For example, suppose you make sneakers and you have a company division that makes gold-colored sneakers with specialty soles and that division has turned out not to be the big money-maker you hoped. Or maybe that division is breaking even but would be the first division you would cut unless it starts to show more signs of promise. You might refer to that division as being marginal. That usage of the word "marginal" is not what economists mean by the term, although you might be able to see how they are related. The layman's usage means at the edge or borderline workable.

The term "marginal cost" is not the same as opportunity cost. Opportunity cost is from the perspective of a buyer, while marginal cost is from the perspective of a seller or producer. That is, opportunity cost refers to what you have to sacrifice-at the margin-as a buyer because when you buy one thing you can't buy something else. Marginal cost refers to what a seller or producer has to sacrifice in order to sell or produce one more item.

If you enjoy math, you might find it helpful to see that in economics the word "marginal" means the derivative or slope of a curve. It's the additional cost or benefit that derives from a very small change. For example, if you increase your saving by $1, what would be the marginal benefit? It would be some small number-say, an additional 5 cents in interest you might gain, plus some psychological marginal benefit-say, something you value at 2 cents-in terms of additional feelings of security. The marginal benefit would thus be the sum of the 5 cents in interest plus the 2 cents in feelings of additional security, or $0.07 per additional dollar saved. If you plot a curve between the benefits and costs, the slope is .07. That's the marginal benefit. The marginal cost is the inverse.

Definitions and Basics

Marginalism, from the Concise Encyclopedia of Economics

Adam Smith struggled with what came to be called the paradox of "value in use" versus "value in exchange." Water is necessary to existence and of enormous value in use; diamonds are frivolous and clearly not essential. But the price of diamonds-their value in exchange-is far higher than that of water. What perplexed Smith is now rationally explained in the first chapters of every college freshman's introductory economics text. Smith had failed to distinguish between "total" utility and "marginal" utility. The elaboration of this insight transformed economics in the late nineteenth century, and the fruits of the marginalist revolution continue to set the basic framework for contemporary microeconomics.

Thinking at the Margin, a LearnLiberty video.

Why are diamonds more expensive than water? Prof. Mario Villarreal-Diaz answers this question using what economists call marginal analysis.

The Marginal Revolution

Neoclassical Economics, from the Concise Encyclopedia of Economics

Several economists in different places at about the same time (the 1870s and 1880s) began to base value on the relationship between costs of production and "subjective elements," later called "supply" and "demand." This came to be known as the Marginal Revolution in economics, and the overarching theory that developed from these ideas came to be called neoclassical economics. (The first to use the term "neoclassical economics" seems to have been the American economist Thorstein Veblen.)...

William Stanley Jevons, biography in the Concise Encyclopedia of Economics.

William Jevons was one of three men to simultaneously advance the so-called marginal revolution. Working in complete independence of one another-Jevons in Manchester, England; Leon Walras in Lausanne, Switzerland; and Carl Menger in Vienna-each scholar developed the theory of marginal utility to understand and explain consumer behavior. The theory held that the utility (value) of each additional unit of a commodity-the marginal utility-is less and less to the consumer. When you are thirsty, for example, you get great utility from a glass of water. Once your thirst is quenched, the second and third glasses are less and less appealing. Feeling waterlogged, you will eventually refuse water altogether. "Value," said Jevons, "depends entirely upon utility."

In the News and Examples

Costs and Benefits of going to the dentist

The Marginal Tooth, by Bryan Caplan on EconLog

Every patient gets the same lecture: "If you don't floss, you'll loose your teeth. I told you this last time, and you're still not flossing!" Has it ever occurred to dentists that the marginal benefit of flossing may be less than its marginal cost?...

De Minimis, by Allen R. Sanderson.

Here the "plant and planet advocates" are not entirely consistent. If I wanted to minimize the explicit costs of my eggs, I want the chickens cooped-up in cages on large-scale "egg farms." Eggs laid by free-range chickens are more costly because production is far less efficient. But those who advocate free-range and organic produce are trading off costs against other values-such as my chickens having a little elbow room and a chance to smell some roses. Why do chickens get to have fun but people don't? We could, I suppose, have more costly free-range lettuce if we just let wind power turbines scatter the seeds instead of planting them in tidy, efficient rows.

Recycling is appealing because it seems to offer a way to simultaneously reduce the amount of waste disposed in landfills and to save natural resources....

A Little History

Carl Menger, biography in the Concise Encyclopedia of Economics.

Carl Menger has the twin distinctions of being the founder of Austrian economics and a cofounder of the marginal utility revolution. Menger worked separately from William Jevons and Leon Walras and reached similar conclusions by a different method. Unlike Jevons, Menger did not believe that goods provide "utils," or units of utility. Rather, he wrote, goods are valuable because they serve various uses whose importance differs. For example, the first pails of water are used to satisfy the most important uses, and successive pails are used for less and less important purposes.

Leon Walras, biography in the Concise Encyclopedia of Economics.

Separately but almost simultaneously with William Stanley Jevons and Carl Menger, French economist Leon Walras developed the idea of marginal utility and is thus considered one of the founders of the "marginal revolution."

Advanced Resources

From The Distribution of Wealth: A Theory of Wages, Interest and Profits, by John Bates Clark

We not only admit, but positively claim, that there is a marginal region where wages are adjusted. It furnishes a large outlet for labor; and what men are able to get in this larger marginal field sets the standard of wages. This field is to labor what, in practical thought, the European market is to wheat: it is a place in which any possible surplus of labor may be disposed of at some living rate. If we find such a market, we definitely solve the problem of the law of wages.... [par. VII.26]

Here, then, is a marginal fraction of the supply of labor; and it would seem that it is in a position to set the market rate of pay for all labor. Here, also, is a direct connection between the pay of this marginal part of the laboring force and the product that can be specifically attributed to it. Does this product of marginal labor set the standard of wages, as the price of a final increment sets the general standard of value of commodities? If so, the law of wages would stand thus: (1) By a common mercantile rule, all men of a given degree of ability must take what marginal men of that same ability get. This principle fixes the market rate of wages. (2) Marginal men get what they produce. This principle governs wages more remotely, by fixing a natural standard for them. In this formula we are, indeed, near to the law that we are seeking; but we have not yet reached it. The true law, when accurately stated, sounds much like the foregoing one; but between the two there is a vital difference. [par. VII.29]

In that static condition in which competition would produce its full effects and bring wages to a natural standard, the pay of labor, as has just been shown, would equal the product that could be separately traced to it. We have discovered a limited field in which whatever is produced is due to labor only; but we need to find one that is larger and more elastic. We have to look for an economic field to which many men may go, and in which they will be virtually rent-free and interest-free. They must be able to work unaided and also untaxed and to create a distinguishable product, all of which they will then get. A few men may, of course, till worthless land, and so make themselves free from landlords' and capitalists' claims. Many more may utilize instruments of other kinds that are too poor to afford a rent to their owners. A larger number still may get employment as additional workers in establishments that have good working appliances, and that pay no more for the use of them in consequence of the presence of the marginal men.... [par. VIII.1]

It does not follow that, because a man desires that the product of his industry shall not pay tribute to employers, he needs to take himself away from them. Working near to the man who tills a waste piece of land in an independent way, there may be another man who works on similar land for the owner of it, and gets as wages the value of what he raises. This man is as free from a master's exactions as is the squatter. A man may have, as Adam Smith has said, "neither landlord nor master to share with him," though he work for a master. If he gives his employer no more in value than his employer gives to him, his product is intact, and it all comes to him as wages. It is in positions like these that most marginal laborers are found. They are not working in solitude, yet their products are distinguishable from all other products.... [par. VIII.2]

Chapter 1. Introduction, by James Buchanan and Gordon Tullock in The Calculus of Consent

The attainment of consent is a costly process, however, and a recognition of this simple fact points directly toward an "economic" theory of constitutions. The individual will find it advantageous to agree in advance to certain rules (which he knows may work occasionally to his own disadvantage) when the benefits are expected to exceed the costs. The "economic" theory that may be constructed out of an analysis of individual choice provides an explanation for the emergence of a political constitution from the discussion process conducted by free individuals attempting to formulate generally acceptable rules in their own long-term interest. It is to be emphasized that, in this constitutional discussion, the prospective utility of the individual participant must be more broadly conceived than in the collective-choice process that takes place within defined rules. [par. 3.1.12]

Related Topics

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Margins and Thinking at the Margin - Econlib

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Introduction What does it mean to think at the margin? It means to think about your next step forward. The word "marginal" means "additional." The first glass of lemonade on a hot day quenches your thirst, but the next glass, maybe not so much. If you think at the margin, you are thinking about what ...