Since all the economic resources are scarce, we all need to make choices. One might think while reading the O level lessons that we make choices whether to use this or that. However, for necessities, we cannot make a decision whether to use or not to use them. For example, even if the prices of water increases, we still will use water, we cannot bring the consumption of water to zero. However, increase in prices may result in people trying to reduce the consumption a little bit.
This is where the concept of decision making at the margin comes in. A choice at the margin is, the decision to do a little more or a little less of something.
Many would argue that, one way to induce people to conserve water is to raise its price. A common response to this recommendation is that a higher price would have no effect on water consumption, because water is a necessity. Many people assert that prices do not affect water consumption because people “need” water.
But choices in water consumption, like virtually all choices, are made at the margin. Individuals do not make choices about whether they should or should not consume water. Rather, they decide whether to consume a little more or a little less water. Household water consumption in Male’ totals about 14000 tons per day. Think of that starting point as the edge from which a choice at the margin in water consumption is made. Could a higher price cause you to use less water brushing your teeth, take shorter showers, or water your flower plants less? Could a higher price cause people to reduce their use, say, to 13500 tons per day? or to 13000? When we examine the choice to consume water at the margin, the notion that a higher price would reduce consumption seems much more plausible. Prices affect our consumption of water because choices in water consumption, like other choices, are made at the margin.