THE MARGINAL PRINCIPLE: LET BYGONES BE BYGONES

We close this chapter with a more general point about the use of marginal analysis in economics. While economic theory will not necessarily make you fabulously wealthy.it does introduce you to some new waysof thinking about costs and benefits. One of the most important lessons of economics is that you should look at the marginal costs and marginal benefits of decisions and ignore past or sunk costs.

We might put this as follows: Let bygones be bygones. Dori’t look backward. Don’t cry over spilt milk or moan about yesterday’s losses. Make a hard-headed calculation of the extra costs .you’ll incur by any decision. and weigh these against its extra advantages. Make a decision based on marginal costs and marginal benefits, This is the marginal principle, which means that people will maximize their incomes or profits or satisfactions by counting only the marginal costs and .

Marginal benefits ofa decision. There are countless situations in which the marginal principle applies. We have just seen that the marginal principle of equating marginal cost and marginal revenue is the rule for profit maximization by firms. Another example is investment decisions. When deciding . about whether to invest in a company or sell a house. forget about past gains or losses and decide only on the basis of marginal returns and costs. The marginal principle is one of the central lessons of economics.

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