Marginal analysis is the field of economics that examines the net benefit or cost of consuming or producing one additional unit of a good.
Marginal analysis is a part of the school of economic thought known as Marginalism which was popularized by Jevon, Menger and Walras (Winch)
The major laws of economics that apply in marginal analysis are the laws of diminishing marginal utility and the law of diminishing marginal productivity.
The law of diminishing marginal productivity states that the marginal benefit that is gained from adding an additional variable in the production process (labor, land, capital) eventually declines after a while. (Foldvary)
The law of diminishing marginal utility states that the marginal benefit gained from consumption of a good eventually declines after a while. (Foldvary)
Marginal analysis is applicable to most concepts of managerial and classical economics, but it is of particular importance when dealing with labor economics, production decisions, profit maximization and managerial decision-making. Outside of the business world, marginal analysis is particularly useful in evaluating politics, sports management and individual personal consumption choices.
In labor economics, economists use the idea of marginal productivity of labor to explain income distribution and wage rates. Using marginal analysis, many economists have theorized that employee wages (the marginal cost incurred by the company paying him/her) are equal to an employee’s marginal product of labor. This has been a controversial, but thought provoking topic.
In profit maximization, marginal analysis is used to determine the profit maximizing quantity for a company. When a company is in a position to choose its price (which is called a price-searcher) in a marketplace, it will produce at a quantity where marginal revenue is equal to marginal cost.
Profit maximization is not the only aspect of decision-making. Managerial economics includes budget constraints, supply and demand, game theory and evaluating production quantities in abnormal market conditions. Marginal analysis has its place in all of these areas. The “law of economizing” states that individuals (firms and consumers) will engage in actions that maximize their gains and minimize their losses.
Example 1
Billy has a lemonade stand, which sells two forms of lemonade – pink and traditional lemonade. His cost of producing traditional lemonade is $2. He uses pink food coloring to make the pink lemonade, costing him 25 cents per glass.
Customers like the pink color, and they are willing to pay 20 cents more than they would for traditional lemonade.
The marginal revenue gained from making the lemonade pink is 20 cents.
The marginal cost is 25 cents.
Question 1:
What should Billy do?
Stop production of pink lemonade
Continue production of pink lemonade
(Answer = A)
Question 2:
Suppose the pink lemonade brought a marginal revenue of 30 cents. What should Billy do?
Stop production
Continue production
Answer = B
Question 3:
The additional benefit gained from the pink lemonade is known as marginal benefit. T / F
Answer: T
Example 2:
Big Joe Fazoli is the coach of the local football team, the “Fighting Pizzas”. Last year they went 0-13 in their season and they are looking to recruit some new talent. He scouted the local football teams and found that local running-back Fred Meatball is deciding to stay close to home.
Joe Fazoli is a hard-nosed negotiator and realizes that he wants to ensure that he gets a solid marginal product of labor out of Meatball. He decides to pay him a rate of $10 per every yard. Secretly, Fazoli values a yard at $12.
Question 4:
What would Meatball’s rate of $10/yard be in marginal economic terms (from the Coach’s perspective)?
Marginal Product of Labor
Marginal Diminishing Return
Marginal Economic Impact
Answer: A
Question 5:
Meatball’s impact on the team eventually declines, despite his talent and performance. Thiis is an example of what law.
Marginal analysis is a part of the school of economic thought known as Marginalism which was popularized by Jevon, Menger and Walras (Winch)
The major laws of economics that apply in marginal analysis are the laws of diminishing marginal utility and the law of diminishing marginal productivity.
The law of diminishing marginal productivity states that the marginal benefit that is gained from adding an additional variable in the production process (labor, land, capital) eventually declines after a while. (Foldvary)
The law of diminishing marginal utility states that the marginal benefit gained from consumption of a good eventually declines after a while. (Foldvary)
Marginal analysis is applicable to most concepts of managerial and classical economics, but it is of particular importance when dealing with labor economics, production decisions, profit maximization and managerial decision-making. Outside of the business world, marginal analysis is particularly useful in evaluating politics, sports management and individual personal consumption choices.
In labor economics, economists use the idea of marginal productivity of labor to explain income distribution and wage rates. Using marginal analysis, many economists have theorized that employee wages (the marginal cost incurred by the company paying him/her) are equal to an employee’s marginal product of labor. This has been a controversial, but thought provoking topic.
In profit maximization, marginal analysis is used to determine the profit maximizing quantity for a company. When a company is in a position to choose its price (which is called a price-searcher) in a marketplace, it will produce at a quantity where marginal revenue is equal to marginal cost.
Profit maximization is not the only aspect of decision-making. Managerial economics includes budget constraints, supply and demand, game theory and evaluating production quantities in abnormal market conditions. Marginal analysis has its place in all of these areas. The “law of economizing” states that individuals (firms and consumers) will engage in actions that maximize their gains and minimize their losses.
Example 1
Billy has a lemonade stand, which sells two forms of lemonade – pink and traditional lemonade. His cost of producing traditional lemonade is $2. He uses pink food coloring to make the pink lemonade, costing him 25 cents per glass.
Customers like the pink color, and they are willing to pay 20 cents more than they would for traditional lemonade.
The marginal revenue gained from making the lemonade pink is 20 cents.
The marginal cost is 25 cents.
Question 1:
What should Billy do?
(Answer = A)
Question 2:
Suppose the pink lemonade brought a marginal revenue of 30 cents. What should Billy do?
Answer = B
Question 3:
The additional benefit gained from the pink lemonade is known as marginal benefit. T / F
Answer: T
Example 2:
Big Joe Fazoli is the coach of the local football team, the “Fighting Pizzas”. Last year they went 0-13 in their season and they are looking to recruit some new talent. He scouted the local football teams and found that local running-back Fred Meatball is deciding to stay close to home.
Joe Fazoli is a hard-nosed negotiator and realizes that he wants to ensure that he gets a solid marginal product of labor out of Meatball. He decides to pay him a rate of $10 per every yard. Secretly, Fazoli values a yard at $12.
Question 4:
What would Meatball’s rate of $10/yard be in marginal economic terms (from the Coach’s perspective)?
Answer: A
Question 5:
Meatball’s impact on the team eventually declines, despite his talent and performance. Thiis is an example of what law.
Answer: Law of diminishing returns