IX. MARGINAL VERSUS AVERAGE VALUES
In economics we often refer to marginal costs, marginal benefits, marginal utility, marginal propensity to consume, marginal this and marginal that. Most people are more accustomed to thinking in terms of averages, however. Some averages are cost per unit (average cost), spending as a proportion of income (average propensity to consume), price (average revenue), etc. Remember, "marginal y" (let y mean whatever kind of marginal this or marginal that you wish, that is, if y is cost, then marginal y would be marginal cost) is the change in y for a one unit change in x (x may be output, income, consumption of good x, etc.) so "marginal y" is the slope of the y function--marginal y = (y2y1)/(x2x1). Marginal y can be thought of as the additional y you get from one more unit of x. The related average would be y/x, which is not the same as (y2y1)/(x2x1).
There is an important relationship between "marginal y" and "average y." If the marginal value is above its average, it pulls the average up. If the marginal is below the average, it pulls the average down. This can be seen easily with the following familiar example. Let y be your total points on quizzes in class and x be a quiz. An additional quiz (x) increases your total points (y) by the points you got on the last quiz. Your marginal score is then your last quiz score. If your last quiz score is above your average, then it pulls up your average (y/x, or total points divided by the number of quizzes), but if your last quiz score is below your average, it pulls down your average.
If the average y is pulled up when the marginal y is above it
and pulled down when marginal y is below it, then where
the two cross (where they are equal), the average changes from
going up to going downTHE AVERAGE IS MAXIMIZEDOR
the average changes from going down to going upTHE
AVERAGE IS MINIMIZED.
PREVIOUS PAGE HOME NEXT PAGE