Final answer:
Economics uses marginal analysis to make incremental decisions by weighing additional benefits and costs, guided by the principle of diminishing marginal utility and disregarding sunk costs.
Step-by-step explanation:
Economics involves marginal analysis because most economic decisions and tradeoffs are incremental rather than absolute. This approach focuses on the evaluation of the additional benefits and costs associated with making a small change in the level of an activity or consumption of goods — often referred to as decisions 'on the margin'. The concept of diminishing marginal utility is fundamental to marginal analysis as it illustrates that the marginal benefit of consuming more of a good or resource decreases as one consumes more. This is vital for making optimal economic decisions where total costs and total benefits may not provide an accurate measure for decision-making; instead, the change in costs and benefits arising from a slight variation in consumption or production can and should be the basis for rational economic choices.
Furthermore, the consideration of sunk costs is essential in this context as these are costs that have already been incurred and cannot be recovered. Econometric models like the Production Possibilities Frontier (PPF) outline how societies decide to allocate resources to produce a combination of goods. Marginal analysis helps in deciding how many more units of one good should be produced at the cost of producing less of another, by looking at the marginal gains and losses, thus informing social choices and the most efficient allocation of resources.