Marginal

Analysis
What is Marginal Analysis?

 Marginal analysis is the process of examining the additional value or benefits gained from a
particular activity compared to the costs of that same activity.
 The marginal analysis definition emphasizes that the analysis is examining the costs and
benefits of buying one more unit of a good or service, as indicated by the term marginal.
 It can also be used to analyze costs and benefits of adding an additional business activity to
production. This one more unit of something is often called a control variable, which is the
input or output that changes by one unit.
 It is used to help business strategists determine if the potential benefits of the additional
business activity are enough to offset the cost of the additional activity, and hopefully
produce a profit. Utilizing marginal analysis within the context of a business is essential to
properly allocating resources and investing in the most profit-maximizing inputs.
 Marginal analysis calculates the net benefits of an additional unit of a good, service, or
business activity. If the net benefits are positive, it is in the favor of the company or the
individual to purchase that additional unit. If they are negative, then the company or person
should not purchase that additional unit.
What is the marginal analysis formula?

• Marginal analysis is the process of analyzing marginal

costs and marginal benefits to determine net
benefits.
• Marginal benefit is the change in total benefits while
marginal cost is the change in total costs.
• Marginal benefits – marginal cost = net benefits.
• If net benefits are positive, then the consumer or
business should move forward with the additional unit. If
negative, they should not.
Marginal Analysis Formula

Marginal analysis is performed by comparing the marginal benefits and marginal costs for an additional unit of a
good or service. The goal is to find the net benefits of the additional unit of a good or service, which is found by
subtracting marginal costs from the marginal benefits. The marginal analysis formula can then be written as:

Net benefits = Marginal benefit – Marginal cost

Marginal benefits are found by determining the change in utility, benefits, or value from the additional unit of a
good or service. This is equal to the change in total benefits divided by the change in quantity, or:

Marginal benefits = (new total benefit – old total benefit) / (new quantity / old quantity) with Total benefit = sum of
all marginal benefits.

Marginal costs are found by determining the additional cost of that additional unit of a good or service, or by
dividing the change in total cost by the change in total quantity. The marginal cost formula can then be written as:

• Marginal cost = (new total cost – old total cost) / (new quantity – old quantity), in which total cost = sum of all
marginal costs.
• Marginal analysis is the comparison of the marginal benefit of an additional unit of a good or
service compared to the marginal cost of that additional unit.

For example, if the marginal benefit of a bottle of water is $6 and the marginal cost is $2, net
benefits equal $4. Since net benefits are positive, it is in the favor of the consumer to purchase
the bottle of water.

The marginal benefit of an additional cookie is $5 while the marginal cost of that cookie is $3.

Net benefits = $5 - $3 = $2.

Since net benefits are positive, it would be in the favor of the consumer to purchase an
additional cookie.

•
Why is marginal analysis important?

Marginal analysis is important because it helps business

strategists to determine where they should allocate their
resources. If net benefits are positive, it is in the best
interest of the business to invest an that additional output. If
negative, it would be a poor investment choice