Marginal Analysis and Decisions

Abstract

In many decision problems it is often our concern whether the benefit of a particular action is greater than the cost. The economist’s traditional technique involves the use of marginal analysis. We may call this the neoclassical approach to decision-making, widely used in microeconomic analysis. As the technique is developed its limitations will become apparent. These limitations provide us with the reason why the technique is not widely used in practice. However because marginal analysis is widespread in microeconomics, and because there are specific circumstances where it will be useful (e.g. see Chap. 14), it is worth spending some time developing these techniques. Before we can do this, attention must be paid to the economist’s methods of expressing relationships. This will stand us in good stead for other chapters in the book, where functional form is important.