I am not 100% sure on this but I think basically, people make decisions depending on the relative satisfaction gained or lost (opportunity cost?). So you will buy a tennis ball instead of a golf ball because you enjoying playing tennis more and it gives more satisfaction.
But there is a problem of diminishing marginal utility as well (i.e. the second tennis ball will give you less satisfaction that the first one) and the fact that problem that money is worth more now that in the future (discounting).
Last edited by shingalingding; 26-12-2006 at 17:58.
making decisions at the margin... take two different ponds you can fish at, and you want to spread 4 fisherman out the most efficiently. if four people fish at one pond the average product for each is 100 say, and the marginal product is also 100 for each person (i.e. there is no diminishing returns to having an extra person fish there within this range). then take another pond which has an average product of 120, say, for four fishers, though it does exhibit diminishing marginal returns. the first fisher has a marginal product of 200, the second 120, the third 90, the fourth 70. you can either base your dispersal of fishers based upon average product or marginal product, however, if you do decide on the margin, clearly the most efficient setup would be two in the second pond and two in the first, to take avantage of the higher marginal products. even though the average product is higher in the second pond, you don't want to put all your fishermen there if you undertake decision making at the margin.