Marginal Analysis and Consumer Choice
| English | Chinese | Pinyin |
|---|---|---|
| margin | 边际 | biān jì |
| marginal benefit | 边际收益 | biān jì shōu yì |
| marginal cost | 边际成本 | biān jì chéng běn |
| utility | 效用 | xiào yòng |
| law of diminishing marginal utility | 边际效用递减规律 | biān jì xiào yòng dì jiǎn guī lǜ |
Why the fifth slice isn't worth it
- The first slice of pizza is amazing. The second, great. By the fifth... meh.
- Each extra slice gives less added enjoyment than the one before.
- Smart choices are rarely "all or nothing" — they happen one unit at a time.
- Economists call this thinking at the margin 边际.
Think at the margin
- Marginal benefit 边际收益 (MB) is the extra benefit from one more unit.
- Marginal cost 边际成本 (MC) is the extra cost of one more unit.
- The rule for any rational choice: keep going while $MB > MC$, and stop where $MB = MC$.
- That point gives the greatest total net benefit — go further and each extra unit costs more than it is worth.
A rational decision-maker keeps doing an activity as long as:
Keep going while MB > MC; stop where MB = MC for the greatest net benefit.
The 4th cookie has a marginal benefit of 6 dollars and a marginal cost of 2 dollars. By how much (in dollars) does making it change your net benefit?
Net benefit rises by $MB - MC = 6 - 2 = 4$. Since MB > MC, it is worth making.
Select all true statements about the best quantity $Q^*$ where $MB = MC$.
At $Q^*$, MB = MC gives the maximum net benefit; MB is highest at the first unit, not at $Q^*$.
Diminishing marginal utility
- Utility 效用 is the satisfaction a good gives you.
- The law of diminishing marginal utility 边际效用递减规律 says each extra unit adds less satisfaction than the last.
- The first slice of pizza has high marginal utility; the fifth adds little.
- This is exactly why demand curves slope downward — you only buy more if the price falls to match the smaller benefit.
Watch marginal utility fall
Each extra unit adds less satisfaction than the last — a falling curve. That is the law of diminishing marginal utility, and it is why demand slopes down.
The law of diminishing marginal utility says that as you consume more of a good:
Marginal (extra) utility falls with each unit — total utility still rises, just more slowly.
Diminishing marginal utility helps explain why demand curves slope downward.
Because extra units are worth less, you only buy more when the price falls.
Spend a budget for the most satisfaction
- To get the most from a fixed budget, compare the marginal utility per dollar across goods.
- The utility-maximizing rule: set $\dfrac{MU_x}{P_x} = \dfrac{MU_y}{P_y}$.
- If one good gives more utility per dollar, shift spending toward it — until the ratios balance.
- That balance is the most satisfaction your money can buy.
To maximize utility from a budget, marginal utility per ______ should be equal across all goods.
The utility-maximizing rule equalises $MU/P$ across goods — marginal utility per dollar.
Think at the margin: do one more unit while MB > MC, and stop at MB = MC. Extra units give less satisfaction (diminishing marginal utility), which is why demand slopes down. Spend a budget so marginal utility per dollar is equal across all goods.