Question

government, consumers and firms are faced with important "economic" decisions because of scarcity. The choices each group make are derived by making "marginal decisions." Can you explain with an example an important marginal decision made by each of these groups?

Answer 1

Marginal decisions refers to the additional costs and benefits incurred due to a decision taken . The marginal decision rule states that an activity should be expanded if its marginal benefit exceeds its marginal cost . As for example let us considers : 1) Consumers : If the marginal utility exceeds the price paid then the consumer should purchase the product . This is the most important marginal decision made by consumers involving utility derived and price paid . Also income constraint or budget constraint plays an important role . Consumers have to allocate their limited income in deriving the maximum utility possible from their consumption basket .

2) Government : marginal decision is taken when calculating the costs and benefits of a welfare programme since resources are scarce . If valuable resources are wasted in programmes where costs exceed benefits then that causes loss of resources .

3) Firms : They take marginal decisions in selection optimal production units . Marginal revenue should be equal to marginal costs .