Marginal Analysis in Economics: Definition, Formula & Examples

Marginal Analysis in Economics: Definition, Formula & Examples
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  • 0:02 What Is Marginal Analysis?
  • 0:43 Understanding Additional Units
  • 1:24 Marginal Analysis Formula
  • 3:02 Example: Applying…
  • 4:32 Lesson Summary
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Lesson Transcript
Instructor: Matthew Greaves
In this lesson, we'll discuss marginal analysis, a very important economic concept. It explains how individuals and businesses make decisions regarding commodities. We'll go over the formula and look at examples before concluding the lesson with a quiz.

What Is Marginal Analysis?

In general, people want to get the most value out of their resources. The same goes for businesses—companies must ensure that the benefits of certain activities outweigh the costs in order to be profitable. One tool for weighing this relationship is marginal analysis, the examination of the costs and benefits of a marginal (small) change in the production of goods or an additional unit of an input or good. For example, a bakery might use marginal analysis to determine the potential benefits of an increase in bread production. This decision-making tool is useful for helping people and businesses decide how to allocate their scarce resources in order to minimize costs and maximize benefits.

Understanding Additional Units

Now that we know that marginal analysis evaluates the relationship between costs and benefits, let's explore what we need to conduct this analysis. Let's start by reviewing the formula for net benefits of production:

net benefits = total benefits - total costs

To conduct marginal analysis, we must analyze how the benefits in the formula above are affected by:

  • Buying one additional unit of a good
  • Producing one additional unit of output
  • Adding one additional unit of an input

The input or output that changes by one is the control variable of our formula. Marginal analysis focuses on whether or not you should change this control variable by one.

Marginal Analysis Formula

We now understand that the aim of marginal analysis is to determine the change in net benefits. So, let's introduce the formula for marginal analysis:

change in net benefits = marginal benefits - marginal cost

Let's look at the right side of the equation. Marginal benefit, also known as marginal revenue, is the increase in total benefits as a result of a change in output of a good by one unit. The equation for marginal benefit is:

Marginal Benefit 1

MR = marginal benefit
TR = total revenue
Q = control variable
delta symbol (triangle) = the change in units

Marginal cost is the increase in total cost as a result of a change in output of a good by one unit. It's represented by the following equation:

MC Analysis C

MC = marginal cost
TC = total cost
delta symbol (triangle) = the change in units

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