Someone well said that decisions in life are hardly black and white. It means that person, a rational being, know how to make best out of available opportunities while making critical choices. This is why rational people think at the margin.
List of basic principles of economics
Just look at the following list of the basic principles of economics.
1.People face trade offs.
2.The cost of something is what you give up to get it.
3.Rational people think at the margin.
4.People responds to incentives.
5.Trade can make everyone better off.
6.Markets are usually a good way to organize economic activity.
7.Governments can sometimes improve economic outcomes.
8.The standards of living depends on country’s production.
9.Prices rise when the government prints too much money.
10.Society faces a short run trade offs between inflation and unemployment.
Decoding why do rational people think at the margin
If one makes decision, he should be assured that the choice he is going to make is better profitable compare to choice he sacrifices. This is the third principle out of ten principles of economics.
For more clarity, better additional return from additional changes in occupation compare to other alternatives. This is called thinking at the margin. Generally, rational people think at the margin whenever they think either to expand production or consumption.
Examples of why do people think at the margin
Suppose, Harry is a small farmer with 5 ha. of land. Traditionally, he used to grow cash crops and vegetables like sugarcane,cotton, brinjal, cauliflower etc. In addition, he have well cared livestock of mulching cattles.
Recently, he has increased his milk production considerably, and he has decided to use some more land for fodder crop over cash and vegetable to maximize profit in rising milk prices.
This is just because he has better earning compare to growing other crops. Then, why should he miss the opportunity to earn extra comparatively.
In other words, people think at the margin means making additional changes to get more increment compare to investing same amount in other”
On the other side, It is the same condition of your neighbours too. They equally want quality milk. Moreover, They ready to pay more to get additional quality. They willing to pay extra compromising non veg. If they get more nutrition from quality milk instead to choose others. So, by making systematic comparative study, he can realise the additional benefits.
Though by investing in milk processing instruments and equipments, he is going to lose some capital but the gain he is going to reap would be surely much more than anything else like pumping resources in cash and vegetable crops.
In simple terms, you will get better additional return to your occupation by investing in milk processing instruments than other economic activities.
Rationale behind the third basic principle of economics
Making decisions based on small changes that you cost less and offer more comparatively is win win situation. As you can’t afford to invest huge amount in economic activity that is absolutely new for you.
If you are in restaurant having breakfast, you can think to order an extra icecream to get more feel with additional spending than anything else. But, if you go for lavish dinner, you will be charged many times more compare to additional benefits in given amount compare to other.
In conclusion, in continuation, you can order an extra item for additional satisfaction of the commodity rather than go for all out option.
Last words on rational people think at the margin,
Truly, people always go for marginal benefits instead of total overhaul. It is a tendency of rational being to think systematically to obtain additional return by spending certain amount.
Simply, here, two points are very important. First, thing he sacrificing to gain other. And, second, more comparative advantage, if he would have invested in other if not now.
And, why not so. Because, it is possible to get better results by employing certain analytical skills in day-to-day economic activities.
Finally, this is the beauty of this economics principle that enable economic actor to get more benefit with extra resource instead to pool in absolutely new. By learning this pattern, anyone could apply in the ongoing business activities.
Actual cost and opportunity cost