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