MGT Notes

Reference, ‘Principles of Economics,’ by N. Gregory Mankiw, 3e, Pg 5

Suppose a concert hall has sold 95% of its tickets at $500 each. It is close to show time and they have empty seats, with standby concert goers willing to pay $300 for a ticket. In this example, the average cost is $500 and the marginal cost is $300. Should the management decide to sell tickets to the folks on standby ? Thinking marginally, if they do not sell the tickets, the seats will go empty. However, if they do sell, the marginal benefit will be the extra money they make while the marginal cost is probably the free concessions or the increased air conditioning expenses that they would incur. Thus, in this case, they should evaluate whether the marginal benefit exceeds the marginal cost.

Marginal changes refer to small incremental changes to an existing plan of action. Rational people think at the margin.