Unformatted text preview: Marginal Analysis
A Key to Economic
Analysis 1 Marginal Analysis
Marginal analysis is used to
assist people in allocating their
scarce resources to maximize
the benefit of the output
Simply getting the most value
for the resources used.
2 Marginal Analysis
Marginal analysis: The analysis
of the benefits and costs of the
marginal unit of a good or
(Marginal = the next unit) 3 Marginal Analysis
A technique widely used in business
decision-making and ties together much
of economic thought.
In any situation, people want to maximize
Net Benefits = Total Benefits - Total
4 The Control Variable
To do marginal analysis, we can change a
variable, such as the:
quantity of a good you buy, the quantity of output you produce, or the quantity of an input you use. This variable is called the control variable .
5 The Control Variable
Marginal analysis focuses upon
whether the control variable
should be increased by one
more unit or not. 6 Key Procedure for Using
1. Identify the control variable (cv).
Determine what the increase in
benefits would be if one
more unit of the control variable
This is the marginal benefit of the
7 Key Procedure for Using
Determine what the
increase in total cost would be
if one more unit of the control
variable were added.
This is the marginal cost of the
8 Key Procedure for Using
If the unit's marginal
benefit exceeds (or equals) its
marginal cost, it should be
added. 9 Key Procedure for Using
Remember to look only at the
changes in total benefits and
If a particular cost or benefit
does not change, IGNORE IT ! 10 Why Does This Work?
Marginal Benefit = Increase in Total
per unit of control
variable TR / Qcv = MR
where cv = control variable 11 Why Does This Work?
Marginal Cost = Increase in
per unit of
variable TC / Qcv = MC
12 Why Does This Work?
Change in Net Benefits =
Marginal Benefit - Marginal
13 Why Does This Work?
When marginal benefits exceed
marginal cost, net benefits go
So the marginal unit of the
control variable should be
14 Example: Should a firm
produce more ?
A firm's net benefit of being in
business is PROFIT.
The following equation calculates
PROFIT = TOTAL REVENUE - TOTAL
15 Example: Should a firm
produce more ?
TR = (Poutput X Qoutput)
n TC = (Pinputi X Qinputi)
i=1 Assume the firm's control variable
is the output it produces. 16 Problem:
International Widget is producing
fifty widgets at a total cost of
$50,000 and is selling them for
$1,200 each for a total revenue of
If it produces a fifty-first widget, its
total revenue will be $61,200 and
its total cost will be $51,500.
Should the firm produce the
fifty-first widget? 18 Answer: NO
The fifty-first widget's marginal
benefit is $1,200
($61,200 - $60,000) / 1
This is the change in total revenue
from producing one additional widget
and is called marginal revenue.
The firm's marginal cost is $1,500
($51,500 - $50,000) / 1
This is the change in total cost from
producing one additional widget.
This extra widget should NOT be
produced because it does not add
Change in Net Revenue (Benefit)
Marginal Revenue - Marginal
- $300 = $1,200 - $1,500
21 Qcv Qwidgets
50 1 TR TR TC
50,000 1,200 1,500
51 61,200 51,500 MR = TR / Qcv = $1,200 / 1 = $1,200
MC = TC / Qcv = $1,500 / 1 = $1,500 22 A Question:
What is the minimum price
consumers would have to pay to
get a 51st Widget produced? Consumers would have to pay at
least $1,500 for the extra
widget to get the producer to
23 Summary Marginal analysis forms the basis of
economic reasoning. To aid in decision-making, marginal
analysis looks at the effects of a small
change in the control variable. 24 Summary Each small change produces some
good (its marginal benefit) and
some bad (its marginal cost). As long as there is more "good"
than "bad", the control variable
should be increased (since net
benefits will then be increased).
25 Practical Exercise:
Turn to the class exercise in
Please complete the class
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- Summer '16
- KAY AMOS
- Economics, Qcv