Margin Concept

Margin also mean edge, think of yourself as sitting on the fence, on deciding what to do. Should I do this or should I do that, then we ask ourselves what is the cost to benefit ratio if I do one or the other (marginal cost vs. marginal benefit), this is what thinking at the margin means.

Before we talk about margin, we have to discuss trade-off and opportunity costs.

Trade-Off - Very simple concept, it's giving up one thing to get something else.
For example: Instead of drinking with friends tonight, I hit the gym or I study.
Instead of buying a new book, I buy a previous edition of a used book.

Opportunity Cost - What you lose (value-wise) in the trade off.
Example: I cut my hours at work to pursue my education.
I lose potential income, so the opportunity cost is the lost potential income to pursue my studies.

Marginal benefit, then would be the positives we get from giving up something and choosing the other.
Example: Although I lose earnings potential for three years, the degree will give me a higher earnings potential.
Example 2: If I study 3 days a week and get a 60% on my test and by choosing to study a fourth day, I get a 70%, then my marginal benefit is 10%

Marginal Cost - The cost of what you give up (think of as cost vs. benefit ratio).
That means if the marginal benefit outweighs the marginal cost, you do it.
If the marginal cost outweighs the benefit, you don't do it.

Example: To upgrade my RAM on my computer only gives me a 5% performance boost, it is not worth me paying the money for a RAM upgrade for such a small performance boost.