Answer:
From an economist's perspective, making choices involves making decisions 'at the margin' -- that is, making decisions based on small changes in resources:
How should I spend the next hour?
How should I spend the next dollar?
In fact, economist Greg Mankiw lists under the "10 principles of economics" in his popular economics textbook the notion that "rational people think at the margin." On the surface, this seems like a strange way of considering the choices made by people and firms. It is rare that someone would consciously ask themselves -- "How will I spend dollar number 24,387?" or "How will I spend dollar number 24,388?" The idea of marginal analysis doesn't require that people explicitly think in this way, just that their actions are consistent with what they would do if they did think in this way.
Approaching decision making from a marginal analysis perspective does have some distinct advantages:
Doing so leads to the optimal decisions being made, subject to preferences, resources and informational constraints.
It makes the problem less messy from an analytic point of view, as we are not trying to analyze a million decisions at once.
While this does not exactly mimic conscious decision-making processes, it does provide results similar to the decisions people actually make. That is, people may not think using this method, but the decisions they make are as if they do.
Marginal analysis can be applied to both individual and firm decision making. For firms, profit maximization is achieved by weighing marginal revenue versus marginal cost. For individuals, utility maximization is achieved by weighing the marginal benefit versus marginal cost. Note, however, that in both contexts the decision maker is performing an incremental form of cost-benefit analysis.
Step-by-step explanation: