CHAPTER 2 MARGINALIST PRINCIPLE
Marginalism is a theory that asserts individuals make decisions on the purchase and
consumption of an additional unit of a good or a service based on the additional satisfaction /
benefit / utility they will receive from it.
In simple sense, any activity one carries pout, if the resultant benefit is larger than the
corresponding costs of that activity, one ought to do more of it.
2.1 Marginalist Principle
The marginal principle refers to an increase in the level of activity if the marginal benefit
(MB) > marginal cost (MC). Optimal decision making suggest that an individual will perform an
activity until the point where MB = MC.
In the case of a buyer, MB refers to the additional benefit derived from consuming a good or
service, whereas MC refers to the additional cost incurred for consuming that good or service.
2.2 Objectives of Economic Agents
For consumers, the aim is to maximise satisfaction or utility. Profit maximisation, on the other
hand, is the aim of producers and firms. The aim of governments is more complex; Gov aims
to maximise social welfare. Mostly, it involves the microeconomic objectives of efficiency and
perhaps equity. Other times, it may also involves the macro economic objectives of Economic
Growth, Unemployment, Inflation, Balance of payment, Exchange rates, etc.
2.3 Rational Decision Making Process
Generally, we can assume individual consumers and producers are rational and are also
motivated by self-interest. meaning, they will aim to maximize their own gains, and mostly do
not care or take into account their own actions on others. Each of the economic agent will thus
follow the golden rule of the Marginalist Principle. For the sake of fulfilling application skills in A-
Level exams, you need to simply weighing the costs and benefits in decision-making. This
marginalist approach to weighing will suffice.
For consumers, MB = MC becomes MU = MC, where
Marginal utility (MU) refers to the additional utility derived from consuming a product, whereas
marginal costs (MC) refers to the additional cost incurred for consuming that product.
Intuitively, we as individuals do make rational decisions at the margin. For instance, it is now
11pm, and you just finished watching Agent of SHIELD, Season 6, Episode 6, and the episode
ends with a cliff-hanger (by Marvel, of course!). You would be thinking to yourself ,”It is only
11pm. I can watch 1 more episode and then go to sleep by 12pm. Tomorrow, I still would be
able to pass my NAPFA fitness test. Well, you have just performed a simple Cost- Benefit
Analysis with the simple Marginal Approach: the additional satisfaction from watching Episode
7 exceeds the additional costs of watching that episode, which is the loss of energy and effort
for next day’s fitness test. (Thus, MB > MC)
However, most likely, you would NOT watch episode 8, afterwards. Cos the additional
satisfaction from watching Episode 8 is less than the additional costs of watching that episode,
which is you may fail the fitness test, and then have to redo the test again in future. (Thus, MB
< MC).
So, to be totally following the rule optimal, you may actually end up watching episode 8,
10minuites into it, and then switched off the device. Of course, we don’t have to do that to
realise that, we are always intuitively following the MB = MC rule.
2.3.1 Decision Making by Firms & Government
For producers, MB = MC becomes MR = MC, where
Marginal revenue (MR) refers to the additional revenue earned from selling a good or service,
whereas MC refers to the additional cost incurred for producing that good or service. A firm
may incur both fixed costs and variable costs in the short run when in production. More on this
marginal approach of MR= MC in the topic for Market Structures.
(Sample essays for Market Structures here)
For government, MB = MC becomes MSB = MSC, where
Marginal social benefit (MSB) refers to the additional social benefit derived from society
consuming a good or service, whereas Marginal social costs (MSC) refers to the additional cost
incurred by society for producing that good or service. Sometimes, there are subtle costs
incurred on society, also known as marginal external costs (MEC), that are easily ignored by
even the rational consumers and producers. More on this marginal approach of MR= MC in the
topic for Market Failure & market efficiency.
(Sample essays for Market Failure here)
2.3.2 Limitations of Marginalist Principle
One obvious example is the difficulty to quantify and estimate the exact size of MB / MSB and
MC / MSC.
A recent example: A particularly relevant example and widespread case could be a MRT (mass
rapid transit) development in a housing estate in Singapore. The externalities of both
positive and negativecan be far reaching as a result of this development. Cost-benefit
analysis (CBA) by the government, however, genuinely attempts to quantify the opportunity
costs to society of the various possible outcomes as a result of this development. It seeks to
include all the costs and benefits, not just private ones. But there are costs and benefits where
no market is available. For example, how can the government precisely value the degradation
of scenic beauty of a hill or the loss of forested area or the value of living near a MRT station?
This is exactly what is happening to the Cross Island Line (CIL). Residents affected by the
construction of the CIL raised that the government is not considering enough negative impacts
on their well-being. In addition, the voiceless nature, especially near the areas of MacRitchie
Reservoir would suffer environmental damage, and a huge loss of nature trail beauty to
outdoor persons. What’s the chance of the SG government estimating correctly the MB and
MC?
Thus, the ability to recognise constraints, trade-offs, as well as intended and unintended
consequences when using marginalist approach / principle is crucial. Similarly, when gathering
information and considering perspectives. More on this in our JC Econs lessons.
