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marginal

The difference made by one extra unit of something. Marginal revenue is the extra revenue earned by selling one more unit of something. The marginal price is how much extra a consumer must pay to buy one extra unit. Marginal utility is how much extra utility a person gets from consuming (or doing) an extra unit of something. The marginal product of labor is how much extra output a firm would get by employing an extra worker, or by getting an existing worker to put in an extra hour on the job. The marginal propensity to consume (or to save) measures by how much a household’s consumption (savings) would increase if its income rose by, say, $1. The marginal tax rate measures how much extra tax you would have to pay if you earned an extra dollar. The marginal cost (or whatever) can be very different from the average cost (or whatever), which simply divides total costs (or whatever) by the total number of units produced (or whatever). A common finding in microeconomics is that small incremental changes can matter enormously. In general, thinking “at the margin” often leads to better economic decision making than thinking about the averages. Alfred Marshall, the father of Neo-classical economics, based many of his theories of economic behavior on marginal rather than average behavior. For instance, given certain plausible assumptions, a profit-maximizing firm will increase production up to the point where marginal revenue equals marginal cost. This is because if marginal revenue exceeded marginal cost, the firm could increase its profit by producing an extra unit of output. Alternatively, if marginal cost exceeded marginal revenue, the firm could increase its profit by producing fewer units of output. In all walks of life, a basic rule of rational economic decision making is: do something only if the marginal utility you get from it exceeds the marginal cost of doing it.

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