Help me understand the marginal revolution.

January 30, 2008 9:23 AM

Nascent interest in economics and economic thinking. Having a bit of problem with the theory of the margin. Wikipedia is not that helpful.

What exactly does it mean to "think at the margin?" I understand the basic definition of the margin -- how much it costs to produce one MORE unit of a widget rather than the average widget cost, but I'm a bit unclear on marginal utility and how it differs from utility in general. Can you provide me with some examples of thinking at the margins as well as some definitions for marginal utility?

posted by proj to science & nature (4 comments total)

IANAE(conomist). My professor gave what I thought was a helpful explanation years ago, though:

Think of being hungry and eating a delicious apple. Your utility is pretty high, as is your marginal utility. (In fact, since it's the first one, they're the same.) If you eat a second apple, though, you probably gain less utility from the second apple. Total utility increase, but your marginal utility is lower. (And he went on for absurdly long, until, by the point when you're eating the 11th apple, you're at negative marginal utility, since they're making you sick at that point.)

Not sure if this helps or not?
posted by fogster at 9:41 AM on January 30, 2008

A food related explanation is common:

Marginal utility is how much extra utility a person gets from consuming (or doing) an extra unit of something. For example, you might enjoy your first mars bar, the second perhaps not so much, the third might make you nauseous.
Implicit in this is that you are likely to save the money on the third and use it for something else, because the utility of doing so will be higher than the third mars bar, even if the something else had less utility than the first or second mars bar.
posted by biffa at 9:47 AM on January 30, 2008

Following up with a similar example to Fogster, you can also see that the price of something is typically on the margin.

Consider water. You need to drink water or you'll die. Even though it's an essential component of life, in typical conditions no one is going to give up all their wealth for a glass of water. In fact, the price of water is on the order of pennies a gallon. Why?

That first drink, the one that you must have to keep from dying, is basically priceless to you. Similarly for your second, third, etc., drink. But your willingness to pay for the 1,000th gallon is a somewhat less. At some point, there's enough water available to you that you're willing to literally flushing it down the toilet. You may also be willing to buy a little more water, so you can get rid of that crappy low flow toilet, provided the water were cheap enough. That's your downward sloping demand curve: the marginal utility of water -- how much you value each additional unit -- goes down the more you have of it. The first glass: priceless. The 10,000th glass: toilet water.

Supplying water is the mirror image of this. Say, you're near a well. The first drink of water takes almost no effort: you can scoop it up with your hand. At some point, to get the 1,000 drink, the water is beyond the reach of your hand and you have to invest in a pail. Then a pail with a rope, and then a winching system. At some point, the well doesn't replenish itself quickly enough for the amount of water you want to get from it, so you have to spend effort looking for a second well, and so on. At some point, you're at the ocean thinking about what it takes to build a desalination plant. For the supplier, the cost of that additional drink of water increases. The first drink, more or less free. At the other end of the scale, you have to sink $5 million into your desalination plant before you can get the first drop of water out of it.

If you're interested, I suggest you listen to the EconTalk podcast over at http://www.econtalk.org/. It's a good view into the economic way of thinking. Similarly, there's a bunch of pop econ books, such as Tim Harford's Undercover Economist and Robert Frank's Economic Naturalist. The latter book is actually an edited collection of student essays Prof. Frank had his students write, to get them to use economic thinking to illuminate little mysteries the students might run across. The former is a good introduction to basic economic concepts, starting with coffee, which is where all good things start from.
posted by chengjih at 10:07 AM on January 30, 2008 [2 favorites]

The marginal case is the guy in the middle, the guy who can go 50-50 on the decision at hand. It is a theoretical position used for explaining the effect of small changes on large populations.

Look, for example, at gasoline prices. Say we are talking about doubling the prices via taxes to accomplish some goal. There will be some people it wouldn't really effect. There are other people who can't now and won't after the change be able to afford gasoline. The marginal cases are the people who have the ability to choose. They can buy the same amount of gas at the expense of other things, or they can buy less gas rather than reduce. (This might be a flawed example, now that I think of it.)
posted by gjc at 6:00 PM on January 30, 2008