Economics
Marginal Analysis
Marginal analysis is a decision-making tool that evaluates the benefits and costs of producing or consuming one additional unit of a good or service. It involves comparing the marginal benefit with the marginal cost to determine the optimal level of production or consumption. By focusing on the incremental changes, marginal analysis helps in making efficient resource allocation decisions.
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10 Key excerpts on "Marginal Analysis"
eBook - PDFMacroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
5. Ing-Haw Cheng, Harrison Hong, and Kelly Shue, “Do Managers Do Good with Other People’s Money?” NBER Working Paper No. 19432 (September 2013). Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 1 The Art and Science of Economic Analysis 9 Economic choice is based on a comparison of the expected marginal benefit and the expected marginal cost of the action under consideration. Marginal means incremental, additional, or extra. Marginal refers to a change in an economic variable, a change in the status quo. A rational decision maker changes the status quo if the expected marginal benefit from the change exceeds the expected marginal cost. For example, Amazon.com compares the marginal benefit expected from adding a new line of products (the addi- tional sales revenue) with the marginal cost (the additional cost of the resources required). Likewise, you compare the marginal benefit you expect from eating dessert (the additional pleasure or satisfaction) with its marginal cost (the additional money, time, and calories). Typically, the change under consideration is small, but a marginal choice can in- volve a major economic adjustment, as in the decision to quit school and find a job. For a firm, a marginal choice might mean building a plant in Mexico or even filing for bankruptcy. By focusing on the effect of a marginal adjustment to the status quo, the economist is able to cut the analysis of economic choice down to a manageable size.
eBook - PDFMicroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
5. Ing-Haw Cheng, Harrison Hong, and Kelly Shue, “Do Managers Do Good with Other People’s Money?” NBER Working Paper No. 19432 (September 2013). Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 1 The Art and Science of Economic Analysis 9 Economic choice is based on a comparison of the expected marginal benefit and the expected marginal cost of the action under consideration. Marginal means incremental, additional, or extra. Marginal refers to a change in an economic variable, a change in the status quo. A rational decision maker changes the status quo if the expected marginal benefit from the change exceeds the expected marginal cost. For example, Amazon.com compares the marginal benefit expected from adding a new line of products (the addi-tional sales revenue) with the marginal cost (the additional cost of the resources required). Likewise, you compare the marginal benefit you expect from eating dessert (the additional pleasure or satisfaction) with its marginal cost (the additional money, time, and calories). Typically, the change under consideration is small, but a marginal choice can in-volve a major economic adjustment, as in the decision to quit school and find a job. For a firm, a marginal choice might mean building a plant in Mexico or even filing for bankruptcy. By focusing on the effect of a marginal adjustment to the status quo, the economist is able to cut the analysis of economic choice down to a manageable size.
eBook - PDFPushing the Numbers in Marketing
A Real-World Guide to Essential Financial Analysis
- David L. Rados(Author)
- 1992(Publication Date)
- Praeger(Publisher)
Chapter 5 Averages and Marginals—What Marginal Analysis Says It is embarrassing to have to include this chapter, because to a micro- economist, the material it deals with is so obvious. And it is obvious, just as it is obvious to a beginning student of harmony what is wrong with parallel fifths and parallel octaves; just as it is obvious to a beginning cook thickening a sauce why a boiling liquid must be added slowly to beaten egg yolks; just as it is obvious to a beginning writer why this sentence is wrong: "She is one of those women who is cursed with beauty." 1 That is, it is not so obvious at all, except to those in the know who typically no longer remember when or why the ideas were not so obvious. Hence this chapter is necessary even though some feel that it is obvious and that the material would not tax the brain of a midge. At least the reader may be comforted to know that the material is crucial to using Marginal Analysis. THE MARGINAL PRINCIPLE The marginal principle teaches one to base the economic analysis of a decision solely on marginal costs and marginal revenues. If the marginal revenues of some course of action exceed the marginal costs, do it. If marginal revenues are less than marginal costs, don't. In the simplest of situations, the one beloved of microeconomists, it says that the owner of a small business should increase production as long as the extra revenue that comes from increasing production exceeds the extra cost. We might imagine the owner testing each proposed addition: "If I sell one more unit, will the revenue I get exceed the extra cost of producing it?" A more charming way of putting the point is found in this excerpt from an economic classic: When a boy picks blackberries for his own eating, the action of picking is probably itself pleasurable for a while; and for some time longer the pleasure of eating is more than enough to repay the trouble of picking. But after he has eaten a good
eBook - ePubSocial and Business Enterprises (RLE: Organizations)
An Introduction to Organisational Economics
- Jonathan Boswell(Author)
- 2013(Publication Date)
- Routledge(Publisher)
What about the more rarefied approach, starting from the ideal? First, some definitions. Marginalism in the strict sense means a concern with the effects of one-unit changes in quantifiable aggregates. Thus marginal cost as already mentioned, is the money cost increase associated with a one-unit increase in output. Marginal revenue is the revenue (money benefit) increase associated with a one-unit increase in sales. Marginal productivity is the ability of one extra unit of an input to increase production. Marginal utility or disutility is the extra satisfaction or benefit (dissatisfaction or cost) experienced by consumers or citizens as a result of a one-unit increase in goods or services consumed (burdens imposed). Theoretical neoclassical economics assumed, first, that these things are measurable. It added a crucial behavioural hypothesis, namely that businesses, organisations, consumers and individuals frequently (mostly? always?) seek to optimise their positions by minimising their costs and maximising their benefits. It then mixed this powerful potion and deduced an historically important idea, the equimarginal principle. To illustrate the principle it is easiest to take a simplified version of the pricing problem already discussed in relation to Company X. Let us assume that Company X makes a single product, Y, knows exactly what effect price changes will have on Y's sales, and is pursuing maximum profit. Figure 2 shows the price of Y on the vertical axis, its output on the horizontal axis. The two curves then show what X's marginal costs and marginal revenues will be at varying levels of price and output. The area below the MC curve measures the total cost of producing any output. The area under the MR curve measures the total revenue from the sale of any output. The important point is that maximum profit would be attained when the MC and MR curves intersect at P
eBook - PDFWelfare Economics
Towards a More Complete Analysis
- Y. Ng(Author)
- 2003(Publication Date)
- Palgrave Macmillan(Publisher)
This requires important adjustments to be made to our welfare economics and cost–benefit analysis, and to other appli- cations and policy measures based on it. The focus on the above two matters reflects partly their importance and partly my involvement in their development. This focus does not diminish the relevance of other factors that a more complete analysis of welfare needs to take into account, but analysing them all is beyond the capability of a single researcher. 230 10.2 Marginal versus infraMarginal Analysis Economic (and in fact many non-economic) decisions can be classified into marginal decisions about variables, for example how much or how many units one should buy, sell, produce, invest and so on, and inframarginal decisions such as whether to set up a business, and if so, which good to produce; whether to produce a good or input yourself or buy it from the market; and whether to get a job and in which occupation. While marginal decisions on the appropriate value of variables is important, it is often the inframarginal ‘whether’ and ‘which’ decisions that are decisive in one’s success or failure and welfare. Think of your (or your parents’) classmates in high school or university – their fortunes now probably depend much more on which degrees they took at university and on which lines of business or occupation they took up than on how many hours of study or work they allocated to the various activities. While inframarginal decisions are very important, since the neoclassical marginalism revolution orthodox economic analysis has concentrated on the Marginal Analysis of resource allocation and has largely ignored the division of labour and specialisation emphasised by classical economists. The economies of specialisation make all-or-nothing choices sensible. A person who specialises in economics does not teach or do research in physics or chemistry.
eBook - PDF- Y. Ng(Author)
- 2009(Publication Date)
- Palgrave Macmillan(Publisher)
While inframarginal decisions are very important, orthodox eco- nomic analysis after the neoclassical marginalism revolution con- centrates on the Marginal Analysis of resource allocation, largely 56 Increasing Returns and Economic Efficiency ignoring the problems of division of labour and specialization empha- sized by classical economists. The economies of specialization make all- or-nothing choice sensible. A person who specializes in economics does not teach or does research in biology, physics or chemistry. (I violated this myself, spending, while writing my PhD thesis, two weeks on the theory of relativity, understanding it; two weeks on quantum physics, mystified by it; and, later, publishing a dozen papers in biology, maths, philosophy, and psychology; that is why I am not as good an econo- mist! Ha! This violation may be explained by the preference for diver- sity on the consumption side and that research is both production and consumption, a complication not yet allowed in our formal analysis.) A farmer does not work in the factory; a factory worker does not grow rice. The values of many variables are zeros. The solution point is at a corner. To compare the desirability of such corner solutions requires something more than just Marginal Analysis; infraMarginal Analysis or the comparison of total costs and benefits across different corner solutions is required. When Marshall (1920) synthesized the contribu- tions of neoclassical economics, the use of differential calculus had been introduced in economic analysis with great success. It is very use- ful in the Marginal Analysis of resource allocation which involves the comparisons of marginal adjustments. However, Marshall did not have access to such mathematical techniques as the Kuhn-Tucker conditions for handling corner solutions. Marshall avoided the problems created by corner solutions by adopting the dichotomy between pure consum- ers and pure producers.
eBook - PDFThe Economics of E-Commerce and Networking Decisions
Applications and Extensions of Inframarginal Analysis
- Y. Ng, H. Shi, G. Sun, Y. Ng, H. Shi, G. Sun(Authors)
- 2003(Publication Date)
- Palgrave Macmillan(Publisher)
Not only is it claimed by many non-economics faculty members that economics is quite irrelevant to real businesses (and hence many business- men can do very well without it) but also economics departments are losing potential students and high profile faculty members to business schools. As an economist myself, it is an overstatement to say that I am sympathetic to this view. However, as social scientists, perhaps we should ask ourselves: do they have some good reasons to feel this way? Might not our economics be missing something important in today’s business world? My outline of infraMarginal Analysis may throw some light on this 11 * I am grateful to Heling Shi and Xiaokai Yang for assistance during the drafting of this chapter. Y. Ng et al. (eds.), The Economics of E-Commerce and Networking Decisions © Palgrave Macmillan, a division of Macmillan Publishers Limited 2003 question. More ambitiously, the incorporation of the infraMarginal Analysis of networking decisions may make economics more relevant to the real world. (Even before this extension, economic analysis has much relevancy and is very important for practitioners in various business areas and beyond; see Lazear, 2000.) Real business decisions can be categorized into two main classes: mar- ginal decisions about resource allocation and inframarginal networking decisions. The latter includes such decisions as: which line of business does one engage in? Should one adopt a new method of production? The former includes: how much to produce? how much of an input to use? InfraMarginal Analysis is the total cost–benefit analysis across corner solu- tions in addition to the Marginal Analysis of each corner solution. If the optimum value of a decision variable takes on its upper or lower bound (usually zero), the optimal decision is a corner solution. In many cases, the inframarginal networking decision is much more important than the marginal decision.
No longer available |Learn more- William Baumol, Alan Blinder, John Solow, , William Baumol, Alan Blinder, John Solow(Authors)
- 2019(Publication Date)
- Cengage Learning EMEA(Publisher)
The “law” of diminishing marginal returns crops up a lot in ordinary life— not just in the world of business. Consider Jason and his study habits: He has a tendency to procrastinate and then cram for exams the night before he takes them, pulling “all-nighters” regularly. How might an economist compare Jason’s marginal reward from an additional hour of study in the wee hours of the morning, relative to that of Colin, who studies for two hours every night? Closer to Home: The Diminishing Marginal Returns to Studying Bill Varie/Alamy Stock Photo Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 7 Production, Inputs, and Cost: Building Blocks for Supply Analysis 133 7-3 MULTIPLE INPUT DECISIONS: THE CHOICE OF OPTIMAL INPUT COMBINATIONS 4 Up to this point we have simplified our analysis by assuming that the firm can change the quantity of only one of its inputs and that the price the product can command does not change, no matter how large a quantity the producer offers for sale (the fixed price is $15,000 for Al’s garages). Of course, neither of these assumptions is true in reality. In Chapter 8, we will explore the effect of product quantity decisions on prices by bringing in the demand curve. First, we must deal with the obvious fact that a firm must decide on the quantities of each of the many inputs it uses, not just one input at a time. That is, Al must decide not only how many carpenters to hire but also how much lumber and how many tools to buy. Both of the latter decisions clearly depend on the number of carpenters in his team.
eBook - ePub- William K. Bellinger(Author)
- 2015(Publication Date)
- Routledge(Publisher)
mutually beneficial trade , which in simple terms states that free and informed trade in a market generally benefits both buyers and sellers. Defining these net benefits for consumers and producers involves two crucial concepts in policy analysis, consumer and producer surplus. Each will be explained carefully below.In theory, the consumer will weigh the benefits and costs of each unit purchased and buy only those units for which the marginal benefits are greater than or equal to the marginal costs. The benefits of consumption are not directly measured in terms of money, and for good reason. The pleasure we receive from consumption is generally experienced in terms of an emotional or perceptual response, such as increased happiness or decreased discomfort. Economists summarize these non-monetary benefits in the rather dull word, utility .DefinitionsMarginal utility is the utility gained by consuming one more unit of a product.Total utility is the satisfaction gained from all units consumed. It also equals the sum of the marginal utilities of all units consumed.For most consumers and most products, the marginal utility of the second unit is less than that of the first unit, the marginal utility of the third is less than that of the second, and so on. This behavioral principle is called the law of diminishing marginal utility . For example, a hiker emerging from a desert trail may be in extreme discomfort due to thirst. His or her first glass of water will provide a high level of marginal utility because it eliminates the most urgent discomfort caused by his or her thirst. A second glass probably will also offer considerable marginal utility, but less than the first. This pattern of positive but decreasing marginal utility will continue for additional glasses of water that might be used for rinsing our face, our feet, or our pet. It is also common for marginal utility to eventually reach zero and then become negative. This would be consistent with the common phrase “too much of a good thing.”Under most circumstances, utility cannot be directly measured. However, in order to assess the benefits of public policy, we must have some way of measuring these benefits. Fortunately, the demand curve offers a simple way of approximating the marginal utility of consumption in dollar terms. The height of the demand curve at a given quantity represents the maximum consumers are willing to pay for that particular unit of the good. In Figure 2.5
eBook - PDFManagerial Economics
Problem-Solving in a Digital World
- Nick Wilkinson(Author)
- 2022(Publication Date)
- Cambridge University Press(Publisher)
We can now examine these effects as they relate to the various forms of production function described in (6.2) to (6.7). First we need to explain more precisely the economic interpretation of marginal effects in the context of production theory. A marginal effect is given mathematically by a derivative, or, more precisely, in the case of the two-input production function, a partial derivative (obtained by differentiating the production function with respect to one variable, while keeping other variables constant). The economic interpretation of this is a marginal product. The marginal product of labour is the additional output resulting from using one more unit of labour, while holding the capital input constant. Likewise, the marginal product of capital is the additional output resulting from using one more unit of capital, while holding the labour input constant. These marginal products can thus be expressed mathematically in terms of the following partial derivatives: Table 6.1 Input–output table for cubic function – Viking Shoes Capital input (machines) K 1 2 3 4 5 6 7 8 Labour input (workers) L 1 4 9 13 18 23 27 31 35 2 8 17 27 36 45 54 62 70 3 12 26 39 53 67 80 B 92 102 4 16 33 50 68 85 102 117 131 5 18 38 59 80 C 100 A 119 137 153 6 20 42 64 87 110 131 150 167 7 20 43 66 90 113 135 155 171 8 19 41 64 87 110 131 149 164 282 6 Production Theory MP L ¼ ∂Q=∂L and MP K ¼ ∂Q=∂K: Expressions for marginal product can now be derived for each of the mathematical forms (6.2) to (6.7). These are shown in Table 6.2, in terms of the marginal product of labour. The marginal product of capital will have the same general form because of the symmetry of the functions. The linear production function has constant marginal product, meaning that the marginal product is not affected by the level of either the labour or the capital input. This is not normally a realistic situation, and such functions, in spite of their simplicity, are not frequently used.
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