Economics 101

Decision-Making on the Margin

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Economists use some terminology that seems unfamiliar and often scares people away from wanting to learn more. I’ve experienced this most in the classroom, having to deal with the trepidation of my students who feel overwhelmed.

But once we unpack these seemingly unfamiliar words, we discover they just make sense.  We are all operating, on some level, as economists.  We make choices under scarcity and we seek knowledge that is scattered.  And we count the costs associated with our choices, at least the obvious costs.  Changing our paradigm to include the economic way of thinking can help us be even more efficient or intentional about our decision-making.

One of these econ-speak terms is “marginal decision-making.” It’s an important element of how we choose, so let’s spend some time on it.

My husband has three sisters and a brother.  Each Christmas, we have a tradition with my in-laws to fill each of our stockings with fun treats and most of them are surprises.  But one gift appears each year and is met with great anticipation: an American Express gift card.  By far, this is my favorite gift because it is a gift of freedom.  I can do whatever I want with that money.  I can go to the mall and buy shoes (always a fun choice for me), buy clothes for my son (more likely), some new books off my wish list, or whatever I want!

And you know what?  I have never done the same thing with that card. My list of what to do with the card is different every year.  That’s because how that gift card will be spent is dependent on the context of time and place.  What are my needs, and what are priorities this year?  That will influence how I spend the card.  When I was in graduate school the card helped buy groceries and pay bills. Because my needs and priorities have changed, now the money mostly goes to my son. And on occasion, shoes.

We are never making decisions in a vacuum; rather all decisions are made at the margin.  This means that they represent relative tradeoffs based on who we are, what we need and what we prefer.  These are all highly context-specific and change based on time and place.  Jim Gwartney defines it this way in his book Common Sense Economics,

Nearly all choices are made at the margin.  That means they almost always involve additions to, or subtractions from, current conditions, rather than all or nothing decisions…We don’t make all-or-nothing decisions, such as choosing between eating or wearing clothes…Instead we choose between having a little more food at the cost of a little less clothing.

In terms of my gift card, it represents a marginal monetary addition to my overall income.  It expands the choices that I can afford and I can allocate it based on my priorities, needs, or wants.

As you read this post, I suspect this way of thinking resonates with you, and that you find yourself using this type of analysis in your choices.  The danger comes when we ignore marginal decision making, which happens often in the world of public policy. For example, you might hear someone say “We need to accomplish (X)!” but the costs of accomplishing (X) are so high, that the marginal benefit is swamped by the added cost.

What does this mean for wise decision-making?  It means that we need to engage in prayerful consideration of all of our stewardship (economic) decisions.  It means we need to avoid placing too much weight on past costs of our time, resources, and energy which are “sunk” (something we discussed last week). Though past costs deserve reflection and prayer and we can learn from them, they are past.

The use of marginal analysis helps us better steward our time, money, and resources for all of our Kingdom-building work.

Question: how have your priorities changed in recent years? Has that affected the decisions you make on the margin? Leave a comment here.

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