In economics, "marginal" is an important concept. Various results are formulated in marginal terms. For example, when marginal revenue (MR) is equal to zero, total revenue is maximized; when MR is equal to marginal cost (MC), profit is maximized.
However, why marginal terms are so essential? It is also not very intuitive. Common people think in total terms: if total benefit is higher than total cost, that's good, and we want total benefit exceeds total cost as much as possible. Why marginal?
In fact, this is a point that should be explained in basic or even elementary economics course, but I am not responsible for such courses. Hence, I haven't prepared much for this. If suddenly I am asked to explain it, I doubt I can do this job properly.
Recently, I have had a look of a book which offers an intuitive explanation. I am glad to share with you:
"A less obvious but equally important implication of the logic of rational choice theory is that rationality requires us to think at the margin. Economists say an action is rational if the benefits are equal to or greater than the costs. So if a can of soft drink costs $2 (the cost) and gives you $5 worth of satisfaction (the benefit), it would be rational to buy and drink it. But suppose that after finishing the first can you remain somewhat thirsty and need to decide whether to buy a second can for the same price of $2. If you value the second can at $1 and think about the costs and benefits of the two cans jointly, you might conclude that it is worthwhile buying the two cans, since the benefits ($5 for the first
can and $1 for the second = $6) exceed the costs ($2 for each can = $4). However, by the time you are deciding whether to buy the second can, you have already enjoyed the benefits and paid the costs of the first. These are no longer relevant to your decision and you should focus only on whether the additional (i.e. marginal) benefit you receive is as large as the additional (i.e. marginal) cost. The extra cost of the second can is $2 and the extra benefit only $1. By thinking at the margin, we can see that this is not a rational choice and we should not buy the second can." (pp.8-9, Economic Perspectives on Government, by Keith Dowding and Brad R. Taylor).
This example is good in illustrating that why and when the total is not necessarily a proper indicator of choice. The total benefit of $6 is still higher than the total cost of $4 if 2 cans of soft drink are bought. So, why not 2 cans? The point is that it is not the maximum. $5-$2 is higher than $6-$4 in total terms. So, total is the concern. But to find out the maximum of the total, you should think at the margin.
But there is a problem with examples like this. Implicitly, a decision sequence is involved: you firstly take one can of soft drink and then decide if you should take one more. Sequential decision-making is of course often involved but it is not necessarily involved. If, for example, a firm has to decide a quantity to produce from the very beginning, and once it is determined, it cannot change the quantity later, then is thinking at the margin still necessary or relevant? Economists will say it is still necessary because MR=MC is where profit is maximized. They can also prove MR=MC mathematically. But that's not an intuitive explanation of the importance of the "marginal". Without sequential decisions, why "marginal" is important?
Perhaps the answer is that the sequence for decisions is not about actual steps to be taken but a steps in one's mind to figure out what is the best position. A consumer simply needs to figure out: By drinking one more can, will I be better off? A firm simply needs to figure out: By producing one more unit, will profit be increased? So, what they need is to think at the margin.
Mathematically, this can never be false: if marginal benefit is higher than marginal cost, then profit will increase, and so profit is not maximized. But why don't we work out the maximum point differently? For example, we have 10 production plans, each with a total benefit and total cost value. We can simply compare the 10 plans to pick up the one with highest profit. We don't need to think at the margin.
But economists will tell you that this method works only if the number of production plans is finite. If there is an infinite number of plans (because quantity can take any values between 0 and 100, and there are infinite points between 0 and 100), the method above does not work. True, but why thinking at the margin can solve the problem when there is an infinite number of plans while the total cannot. In fact, it appears that either both methods do not work or both can work. For example, if we can draw total profit as a curve with respect to quantity, the peak point of the curve is the maximum point. Alternatively, we can draw MR and MC curve. The intersection point is the maximum point for profit.
Hence, while mathematically MR=MC is a condition for maximizing total profit, intuitively, we lack an interpretation for why thinking at the margin is important.
Here is an interpretation I can think of. I am not sure if it captures the key point. But you may take it for reference.
The issue is like climbing mountain for the peak (maximum). If the environment is clear, under a blue sky, when you reach the peak, looking around, you know no anywhere surrounding is above you. That's the peak. But the environment may not be clear. This is a misty day. You can't see clearly even if you are on the peak. But you know that the mountain has only one peak, not like some with several peaks where some are lower and some are higher. Then, what you can do is to keep climbing. You know whether you are climbing up or climbing down. If you are climbing up, keep climbing. If you reach a point where going further will move you down, then go back. The peak point is where you can climb up before it and you will climb down after it. That's thinking at the margin. Essentially, it is a method using local information (moving more or less) to judge if a global peak is reached. But if you have the global information (whole picture is clear), you don't need this method. The marginal method is a rule of thumb for reaching the maximum in case local information is available but global information (whole picture) is hard to find while some pattern (single-peakedness) is known.
