Chapter 1: Ten Principles of Economics- Principle 3: Rational People T

The third principle of economics is rational people think at the margin. To start, rational people can be identified as people who do the best they can to achieve the objective at hand. Economists use the phrase “marginal change” to describe a small change to a plan. Both marginal change and rational people are important to our everyday life, since they can apply when deciding to make another phone call or when considering oil prices.

In regards to the phone call example, consider an older phone call plan. Say you pay $20 a month for a hundred minutes and an extra $5 for every additional ten minutes, then your marginal cost is $0.50 for the following minutes after a hundred minutes. So in this type of situation, comparing the marginal benefit and marginal cost would be the way to go. A common misconception is to compare the average cost, but that does not tell you how much each additional minute costs. For instance, fifty minutes and sixty minutes would have different averages, simply because sixty minutes uses more of the original hundred minutes. Thus, people with a phone bill can consider using this principle of economics to make wiser decisions.

Similar to the way rational people think at the margin applies to a real life situation with the phone bill, oil prices apply to this principle of economics too. In short, Saudi Arabia’s marginal cost for oil is when they pump the last barrel of oil. This is important for the market price for oil, because the price of oil is linked long-term to the market price. When oil prices are lower than the marginal cost, there is demand not met, because of there being no incentive to produce the last barrel of oil. Thus, people involved in the oil industry consider the marginal cost of oil, further showing how the theories of economics can be applied to every day life.

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