0:00:00.246,0:00:01.540 ♪ [music] ♪ 0:00:03.640,0:00:04.768 In economics, 0:00:04.768,0:00:07.780 you're likely to hear[br]the word "marginal" a lot: 0:00:08.473,0:00:09.720 marginal benefit, 0:00:09.720,0:00:11.140 marginal cost, 0:00:11.140,0:00:12.835 marginal revenue-- 0:00:12.835,0:00:14.480 the list goes on and on. 0:00:14.760,0:00:16.727 So what is thinking on the margin, 0:00:16.727,0:00:18.177 and why is it important? 0:00:19.300,0:00:22.092 Marginal just means[br]a little bit more 0:00:22.092,0:00:23.300 or a little bit less. 0:00:24.320,0:00:26.317 Let's imagine[br]that you're watching a movie, 0:00:27.228,0:00:28.760 and you can't hear the dialogue. 0:00:29.060,0:00:31.420 You increase the volume[br]just a little bit. 0:00:32.840,0:00:34.056 How high should you go? 0:00:34.390,0:00:37.511 Well, that's a question[br]of comparing the marginal benefit 0:00:37.511,0:00:40.060 to the marginal cost[br]of increasing the volume. 0:00:42.380,0:00:44.393 The first notch up sounds good. 0:00:44.640,0:00:46.900 Now you can hear[br]what the actors are saying. 0:00:48.400,0:00:49.980 You increase it another notch. 0:00:52.120,0:00:54.940 Speakers are distorting a little, [br]but you still prefer it. 0:00:57.900,0:00:58.920 One more notch. 0:01:01.320,0:01:02.442 Uh-oh! 0:01:03.068,0:01:04.720 Now there's an action scene. 0:01:04.720,0:01:05.841 It's too loud! 0:01:05.841,0:01:07.497 You don't want to wake up[br]your roommates. 0:01:08.747,0:01:10.300 So you decrease it a notch. 0:01:12.720,0:01:14.135 You keep doing this, 0:01:14.135,0:01:16.680 making marginal adjustments[br]up and down, 0:01:16.680,0:01:20.228 comparing the marginal benefit[br]to the marginal cost, 0:01:20.228,0:01:21.620 each step of the way. 0:01:22.940,0:01:24.043 Thinking on the margin 0:01:24.043,0:01:28.334 just means comparing the benefit[br]of the next decision to its cost. 0:01:29.108,0:01:30.919 Notice that thinking[br]on the margin -- 0:01:30.919,0:01:36.020 it's a method or way of arriving[br]at an optimal or best decision. 0:01:36.680,0:01:39.820 If I asked you for the best volume[br]to watch a movie, 0:01:39.820,0:01:41.515 you might have trouble answering. 0:01:42.018,0:01:44.700 But if you keep thinking[br]and acting on the margin, 0:01:45.060,0:01:46.333 you'll come to a point 0:01:46.333,0:01:49.020 where the marginal benefits[br]equal the marginal costs -- 0:01:49.640,0:01:50.780 that's the optimum. 0:01:51.180,0:01:52.604 So thinking on the margin 0:01:52.604,0:01:55.839 is a way of searching for[br]and finding an answer 0:01:55.839,0:01:58.220 to a problem that might otherwise[br]be quite difficult. 0:01:59.540,0:02:01.121 Thinking on the margin 0:02:01.121,0:02:03.180 also tells you something else[br]of importance: 0:02:03.740,0:02:05.580 what not to think about. 0:02:06.140,0:02:08.540 Let's imagine you run[br]a small clothing shop, 0:02:08.760,0:02:12.770 and you think that the 1970s[br]are about to have a renaissance. 0:02:13.680,0:02:15.040 I remember those times! 0:02:15.040,0:02:16.100 ♪ [music] ♪ 0:02:16.100,0:02:19.940 So you load up on 100 pairs[br]of bell-bottom jeans. 0:02:20.660,0:02:23.260 Let's say you paid $75 a pair. 0:02:23.680,0:02:25.540 You price the jeans at $100 -- 0:02:26.060,0:02:30.080 a price that will cover your costs,[br]including rent and wages. 0:02:31.120,0:02:35.844 But unfortunately, the jeans --[br]they just don't sell. 0:02:35.844,0:02:36.960 What do you do? 0:02:37.180,0:02:38.860 You think about lowering the price, 0:02:39.216,0:02:40.476 but your accountant tells you 0:02:40.476,0:02:42.720 that if you lower the price[br]below $100, 0:02:42.720,0:02:45.000 you're guaranteed to take a loss. 0:02:45.440,0:02:46.542 (scream sound) 0:02:47.720,0:02:49.986 Fortunately, you had[br]a good Economics class 0:02:49.986,0:02:51.454 in high school or college, 0:02:51.900,0:02:54.577 so you remember[br]that what you paid for the jeans 0:02:54.577,0:02:55.593 is irrelevant. 0:02:56.040,0:02:57.959 That cost is sunk. 0:02:59.014,0:03:00.620 What matters now 0:03:00.620,0:03:02.971 is to compare the marginal benefits 0:03:02.971,0:03:05.788 and marginal costs of your options. 0:03:06.500,0:03:10.058 One option would be to put[br]the jeans in storage and hope -- 0:03:10.058,0:03:12.175 hope they'll come back in style. 0:03:12.520,0:03:15.460 Maybe you can get $100[br]per pair in the future, 0:03:16.160,0:03:18.255 but you get no money now, 0:03:18.255,0:03:20.260 plus you have to pay for storage. 0:03:21.820,0:03:24.704 Another option is to slash prices. 0:03:25.066,0:03:27.407 Sell them all now for $50 each. 0:03:27.407,0:03:29.583 That lets you clear out[br]your inventory 0:03:29.583,0:03:31.760 and invest in something else. 0:03:32.580,0:03:34.243 You choose option two 0:03:34.243,0:03:36.440 and invest in the next big thing: 0:03:36.846,0:03:37.997 leg warmers! 0:03:39.020,0:03:41.466 Now, I know this sounds simple, 0:03:41.466,0:03:44.280 but actually, even experienced[br]business people -- 0:03:44.762,0:03:48.660 they often focus too much[br]on what they paid for an item 0:03:49.240,0:03:52.960 and not enough[br]on their best choices right now. 0:03:53.520,0:03:56.360 It's called the sunk cost[br]or fixed cost fallacy. 0:03:57.280,0:04:01.300 In fact, I snuck an example[br]of the fallacy right past you. 0:04:01.560,0:04:02.580 Did you catch it? 0:04:03.740,0:04:06.956 Earlier, I said you price[br]the jeans at $100 -- 0:04:07.440,0:04:09.910 a price that will cover your costs,[br]including rent and wages. 0:04:09.910,0:04:12.380 But that's also wrong. 0:04:13.260,0:04:16.660 If bell-bottom jeans turn out to[br]be in huge demand, for example, 0:04:17.300,0:04:19.500 then you should price[br]them for more than $100. 0:04:20.600,0:04:23.180 What you paid for the jeans is irrelevant, 0:04:24.340,0:04:27.840 whether your decision was[br]a bad one or a good one. 0:04:28.980,0:04:32.120 People fall prey to this[br]kind of error all the time, 0:04:32.780,0:04:35.280 especially holding on to past mistakes. 0:04:36.400,0:04:41.700 Maybe you've been told, never give up.[br]Well, take the advice of an economist. 0:04:42.400,0:04:45.460 Sometimes giving up is[br]the smart thing to do. 0:04:46.340,0:04:50.700 Is the movie you're watching boring? Well,[br]buying the ticket was a bad decision. 0:04:51.580,0:04:55.140 But that cost is sunk. Don't[br]throw good time after bad. 0:04:55.920,0:05:00.860 Walk out! No one likes to admit[br]that they made a bad decision. 0:05:01.560,0:05:05.940 And so they stay in bad relationships,[br]bad businesses, and bad careers, 0:05:06.420,0:05:08.940 hoping, hoping to turn things around 0:05:09.140,0:05:13.600 and prove that their past[br]decisions weren't so bad after all. 0:05:13.980,0:05:19.700 An economist says, ignore what[br]you can't change. Ignore the past. 0:05:20.140,0:05:25.740 Focus on the future. Let's[br]summarize thinking on the margin. 0:05:26.400,0:05:30.280 First, think about a little[br]bit more or a little bit less, 0:05:30.460,0:05:33.100 and keep going until you arrive at a point 0:05:33.380,0:05:38.140 where the marginal benefits equal the[br]marginal costs. That's the optimum. 0:05:38.660,0:05:40.940 Second, when making a choice, 0:05:41.580,0:05:47.060 only think about the costs and[br]benefits that change with that choice. 0:05:47.980,0:05:49.700 Ignore sunk costs. 0:05:50.380,0:05:54.900 Thinking on the margin, it's useful,[br]and not just for economics classes. 0:05:55.840,0:05:58.020 But if you are teaching[br]an economics class, 0:05:58.340,0:06:01.520 check out our free unit plan[br]that incorporates this video. 0:06:02.060,0:06:05.720 I promise, the marginal benefit[br]will exceed the marginal cost. 0:06:06.460,0:06:10.220 And if you're ready to test yourself,[br]check out our practice questions. 0:06:11.180,0:06:16.380 Finally, if you're ready for more[br]microeconomics, Click for the next video.