A crucial economic principle is that rational decision making calls for thinking in ~ the margin. This requires a compare of the extr (or marginal) benefits and also costs of an activity.

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An example of such rational behaviour would be deciding to drink one an ext beer or security one much more hour studying only if the additional benefits were greater than the extr costs. The optimum is where marginal advantage equals marginal cost.

And this uses to firms too. A for sure maximises its earnings by creating the calculation at i m sorry marginal revenue is same to marginal cost.

However, a recent publication by the American business guru Clayton Christensen says that thinking in this way can it is in a problem. A recent article in the Guardian defines a story he tells of the time he refused to play because that his college basketball team in a national last which took location on a Sunday and also therefore conflicted through his spiritual beliefs. His decision associated sticking come his ethics rather than reasoning at the margin. Because that him, whilst the marginal expense of sacrifice these principles just once might well have actually been tiny compared come the result benefits, the eventual cost would be lot higher.

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Christensen likewise suggests that similar arguments can use to firm decision making. The over article provides an instance he offers of decision made by executives at the Blockbuster video clip chain. Once smaller rivals started supplying movies by mail, Blockbuster instead ongoing to invest in the existing video clip store business model. This eventually proved disastrous for the company. The explanation offered for this is that structure on previous investments made much more sense than setup up a mail-order arm which would cannibalise your existing business. On the various other hand, an alternative explanation might be the executives in ~ Blockbuster to be irrationally enabling sunk expenses to affect their decision making.



Can friend think the a situation where friend have decided to stick come your principles rather than think in ~ the margin?Why does a firm maximise benefit by developing the calculation at i m sorry marginal revenue is same to marginal cost?What do you think space the main costs of setup up a mail-order business?Are these costs mainly resolved or variable costs?Why is that irrational to take sunk costs into account when making a decision?Can girlfriend think the a instance where you have been influenced by sunk costs?