Firms and consumers who are trying to maximize usually need to weigh
the costs and benefits of their decisions at the margin. For example, when
you consider buying a new shirt, you know the marginal cost of the shirt—
that is, how much you must pay to get that one extra shirt. And you need
to compare that marginal cost to the marginal benefit you will receive—the
extra satisfaction you get from having that shirt. If you are trying to
maximize your utility, you will buy the new shirt only if you think the
benefit to you in terms of extra utility exceeds the extra cost. In other
words, you buy the shirt only if you think the marginal benefit exceeds
the marginal cost.
Similarly, a producer attempting to maximize its profits and considering
whether to hire an extra worker must determine the marginal cost of the
worker—the extra wages that must be paid—and compare it to the
marginal benefit of the worker—the increase in sales revenues the extra
worker will generate. A producer interested in maximizing its profit will
hire the extra worker only if the benefit in terms of extra revenue exceeds
the cost in terms of extra wages.
Maximizing consumers and producers make marginal decisions to achieve their objectives;
they decide whether they will be made better off by buying or selling a little more or a little
less of any given product.The Flow of Income and Expenditure
Figure 1-4 shows the basic decision makers and the flows of income and
expenditure they set up. Individuals own factors of production. They sell
the services of these factors to producers and receive payments in return.