Meaning and definition of Marginal Analysis
Marginal analysis refers to an evaluation of the additional benefits of an activity contrasted to the additional costs of that activity. Marginal analysis is used by companies as a decision making tool to provide help in increasing the profits. Moreover, marginal analysis is used instinctively to make a host of everyday decisions. Also, marginal analysis is generally used in microeconomics while analyzing the complexity of a system being affected by marginal manipulation of its comprising variables.
Significance of Marginal Analysis
Marginal analysis is significant for being one of the 10 principles of economics, as delineated by Harvard economist Gregory Mankiw in his “Principles of Economics.” As per these principles, margin analysis is one principle that governs the decision making rationale of the individuals. For example, a person might weigh such decisions as whether to take a vacation, work additional hours, or even have an extra glass of wine with dinner. Besides, many economists contend that rational decision makers take an action only if the additional satisfaction or benefit, known as the marginal benefit, exceeds the additional, or marginal cost of doing so.
Features of Marginal Analysis
Differential calculus proffers mathematical tools which are helpful to the economists and business experts in performing marginal analysis. Differential functions in calculus look at an outcome or dependent variable, (referred as ‘y’) as a function of one or more independent variables (referred as ‘x’). The equation evaluates the change in the value of y for every increase in the value of x. in economic terms, y signifies benefits and x signifies costs. Therefore, calculus is helpful to the economists in quantifying the change in benefits resulting from an increase in a unit of costs.
Benefits of Marginal Analysis
Marginal analysis is helpful to individuals and businesses in balancing the costs and benefits of additional actions, like whether to produce more, consume more, and similar other decisions, thus determining whether the benefits will exceed costs and increase utility. Moreover, marginal analysis is also beneficial to the government policy makers. Weighing the costs and benefits can help government officials in determining whether allocating additional resources to a specific public program will generate extra benefits for the general public.