Why Is Marginal Analysis Important in Economics?

by Nicole LaMarco - Updated July 25, 2018

At the heart of marginal analysis, it is about investigating what happens to the margin when one extra unit is added. The extra unit is known as the marginal benefit. Companies use marginal analysis to determine if a certain activity is worth taking the time to complete, or not. It's essentially a decision-making tool.

What is Marginal Analysis in Economics?

The marginal definition in economics is the benefit experienced when adding one extra unit and it's called the marginal benefit. The marginal cost is the cost associated with adding one extra unit. Marginal analysis is the process of comparing the marginal benefit to the marginal cost in order to figure out if adding one extra unit is worth it.

Marginal Analysis for Business Owners

A business owner might be curious about whether producing one more unit is worth it. There will be a certain cost incurred by the production of that one extra unit and a certain revenue brought in by the sale of that one extra unit. The business owner will want to know if the revenue exceeds the cost, thus, makes it worthwhile to produce.

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Marginal Analysis for Customers

A customer, on the other hand, might want to figure out if the satisfaction they get from buying one extra unit exceeds the cost of buying that extra unit. The general wisdom here is that if the benefits outweigh the costs then something is worth it, and vice versa.

The Case for Businesses

Businesses will be interested in how marginal revenues measure up against marginal costs. Production decisions are made at the margin for this reason. Since a manufacturer or other business owner wants to make a profit, they will want the revenue made by producing one more unit to exceed the cost of producing that product. If ever a situation arises where the cost of the extra unit is greater than the revenue, then the manufacturer will produce less of that product until it arrives back at a point where the marginal revenue matches the marginal cost or the breakeven point.

The Case for Consumers

Consumers also make their purchase decisions at the margin. It could be anything from picking between two dresses and choosing between going to the movies and staying in and ordering takeout. In this case, they are comparing marginal benefit against marginal cost. Marginal benefit is the satisfaction that the consumer gets from purchasing one more of a given product or service.

It can get pretty interesting, however, since we’re dealing with something that isn’t easy to objectively measure. If the consumer has already been going to the movies for two weeks in a row, they won’t get as much satisfaction from doing it for one extra week as they did before. The number of extra times you get to do something is somehow determined by the number of times you have already done it before.

It isn’t just about monetary costs either. You might be trying to figure out if reading a business-related book for one extra hour will boost your revenue enough to warrant spending that extra hour reading.

About the Author

Nicole LaMarco is a business writer with nearly two decades of hands-on and publishing experience. She's been published in The Employment Times, Web Hosting Sun and WOW! Women on Writing. See her work at www.nickylamarco.com

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