Margin (economics)
Empirical methods Prescriptive and policy Within economics, margin is a concept used to describe the current level of consumption or production of a good or service.
[3] These marginal concepts are used to theorise various market behaviours and form the basis of price theory.
It is a central idea within microeconomics and is used to predict the demand and supply of goods and services within an economy.
[2] It is measured in dollars per unit, and includes all the variable costs that alter depending on the level of production.
[6] Marginal utility describes the added satisfaction or benefits a consumer will obtain by purchasing an additional product or service.
[6] Margin squeeze is a pricing strategy implemented by vertically integrated companies who are the dominant provider of an input.
[15] The company will consequently produce products until the marginal cost of an additional unit is greater than the sale price.
[12][3] Within a perfectly competitive environment, marginalism is used within the principles of demand and supply to show that the intersection of the curves would be the market equilibrium.
In an environment where they can not enact price discrimination, monopolistic companies will theoretically use the concept of marginalism to maximise profit.
A major critique is that the theory ignores how an individual's valuation of a good or service may be dependent on their reference point and personal circumstances and they may not act as ‘rationale’.
[18] This is demonstrated by Richard Thaler’s endowment effect experiment, whereby individuals were sold small objects and then offered an option for the item to be bought back from them.
He found that people would only sell the product at a premium, demonstrating that the value of the good was higher when viewed as something that could be lost compared to something that could be acquired.
[19] John List however performed a similar experiment with trading cards and found these subjects were less influenced by endowment.
His research suggested that traders learnt from prior experiences and make decisions based on long term value, rather than the emotions associated with the loss of the good.
[18] Moreover, findings suggest that benefits and costs are processed in different parts of the brain and thus may not be perfectly correlated.
[18] However, marginal utility theory assumes this deviation to be non-existent and the consumer to be perfectly rational and uniform.
[21] This theory values a good or service based on the duration and intensity of labour required to produce it.
The labour theory of value was used to explain the Diamond-Water paradox as proposed by Adam Smith.
