Tag Archives: marginal cost

02.01.2012 | Marginal Children

By Mira Korber, guest blogger.

American births are on the decline; the number per year has fallen from 4.3 million (2007) to 4 million (2010), perhaps due to a shaky economic situation.

However…

Why is raising more kids less expensive (in some ways, anyway) than having the infamous “only?”

Diminishing marginal costs are the answer.

To begin, here’s the cost of raising one child before adding in the marginal family members.

Now, after this marginal child is born (and then another!), the cost of raising each consecutive sibling decreases substantially. For example, the figures cited in this TIME Moneyland article run thus: an “only” 11 year old might cost $15,830 per year, but add in a 16 year old sibling and you only spend $10,660 more, and finally, add a third kid and you are spending merely an additional $4,580.

A lot of necessary child raising equipment and expenses — from high chairs to cribs to clothes — can be passed from one child to the next as the time comes. And, with many family and parent-child health insurance plans, the monthly cost remains the same regardless of how many kids you have. Simple math shows the price per person then goes down. Who isn’t looking to run the house as an economy of scale?

A final point:

Although college tuitions are more expensive than ever, (and it’s not exactly possible to get an “enroll one, enroll another one free” financial aid package) many schools offer increased economic support for families with more than one child. And this fascinating article shows freshman year for ten kids at universities abroad could cost less than freshman year for one kid in the US.

The Economic Lesson

Everything revolves around the margin. If a family has one child, its second is the marginal child. If a family already has two, the third is the marginal child.

The bottom line: Having more kids demonstrates a diminishing marginal cost of production.

Check out these graphs, which show how marginal cost at first decreases, but will eventually increase again due to the law of diminishing returns. For a different take on studying the margin, look at this recent Econlife post.

An Economic Question: What decisions do you make at the margin in your everyday life?

Posted by: adminEcon
Tags: births, college, families, kids, margin, marginal cost, marginal production, marginal returns, parents, tuition
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09.01.2011 | Stormy Issues

For Hurricane Irene relief, the debate is again about the debt.

Let’s start with the Congress.

Expressed by Texas Representative Ron Paul, government should not play a role because “intrusive” bureaucracy” hinders local people and volunteers. Instead, private insurance is the key.
At the other extreme is Vermont Senator Bernard Sander’s position. He has said that we should unite as a nation, absorb the cost, and help each other when faced with a disaster.
The third point of view comes from Virginia Representative Eric Cantor. Yes, he says we have a responsibility to help each other. However, emergency spending has to be offset by cuts elsewhere.

And now, the economists….

The Economic Lesson

While Paul Krugman and Steven Landsburg disagree, each relates his position on disaster relief to marginal benefit and marginal cost. Whether discussing corporate profit or disaster relief, the point at which Marginal Cost equals Marginal Benefit (MC=MB or MC = MR..Revenue) is the optimal point beyond which we should not continue a certain activity.

It makes sense. We do not want to continue most things when the cost of doing something extra exceeds the benefit of that extra amount.

However, we cannot consider the budget for Irene alone. Then, surely, MB would vastly exceed MC. Krugman and Landsburg point out that we have to look at all federal spending to assess MC and MB.

An Economic Question: After looking here, do you believe the Landsburg prom example adequately explains why he thinks Krugman is wrong?

The above post is a revised version of the original which included a summary of Krugman and Landsburg.

Posted by: adminEcon
Tags: debt, deficit, disaster relief, Hurricane Irene, marginal benefit, marginal cost, Paul Krugman, Steven Landsburg
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08.29.2011 | “Tweetquakes”

Sometimes Tweets travel faster than seismic waves. And then, what happens?

In this wonderful webcomic from April 2010, an earthquake strikes, people Tweet, and within seconds, the news beats the temblor’s spread. Do people run for safety? No. They send new Tweets!

For the August 23, 2011 East Coast quake, 2 Harvard bloggers proved that truth does copy a cartoon. Calling it a tweetquake, they demonstrated that the 40,000+ Tweets that were sent within 1 minute of the quake radiated outward faster than the quake itself. You can see the Tweet spread here.

And here is how people were Tweeting about Hurricane Irene.

The Economic Lesson

Described in “Thinking Like an Economist,” (Lecture 6) from the Teaching Company, the economics of ignorance involves deciding how much information is optimal. Only when the benefit of an extra piece of information outweighs the cost of being ignorant should we be willing to add to our store of knowledge. While initially new data can be valuable, eventually, diminishing marginal utility starts to kick in and that extra piece of information is no longer worth our time or thought.

Even for a Tweet, then, we are always thinking at the margin, choosing a little more or less.

An Economic Question: When researching a topic, when does diminishing marginal utility set in?

Posted by: adminEcon
Tags: "tweetquakes", diminishing marginal utility, information, marginal benefit, marginal cost, Tweets, Twitter
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