How is marginal analysis used to make the optimal decision?

Question

In instances where quantification is difficult, how should we deal with the illusive costs/trade offs if we are to try and optimize our benefits?

Answer 1

It isn't. And there is no general answer. (That's why professional economists disagree about so much when it comes to real-world situations. :-)

What classical economic theory shows is that using marginal analysis allows you to move to a local, short-term optimum - that is, a place where any small change makes you worse off in the short run.

Marginal analysis does NOT deal with:

a. global optimum - the best place you could be. (i.e. if you are in hilly country, the local peak is the top of the hill you are on; the global peak is the top of the tallest hill.

b. dynamic situations - classical economic analysis operates in the timeless now: at any point in time, there is a supply curve, a cost curve, an interest rate, etc.

c. information uncertainty - there has been recent work done on a theory of information uncertainty, but it is not part of classical economics, and while it can be applied to marginal analysis, it rarely is.

In general, what one learns is school is a greatly simplified version of reality. In the case of economics, greatly "over-simplified" might be more accurate: there are no perfect markets; there is no perfect competition; no one really know the supply or demand curves; there are all sorts of external events that greatly affect the economy; things (even in the economy) are changing all the time in ways that classical theory can't address; etc.

One can hope that the kind of thinking one learns in economics courses helps one better understand and deal with what is going on in the real world; but if one assumes that the real world is just a simple application of classical theory, then the education has done more harm than good. There is nothing more dangerous than "knowing" what isn't so.

Answer 2

i dont quite understand the question, but with marginal analysis, you can find out the total benefits/costs, or marginal benefit/cost of production for example, and find out the quantity where net benefit is maximised, or where marginal benefit equals marginal cost, because that is where output will be most effficient.