Marginal Analysis.ppt

Marginal Analysis A Key to Economic Analysis Marginal Analysis Marginal analysis is used to assist people in allocating their scarce resources to maximize the benefit of the output produced. Simply getting the most value for the resources used. Marginal Analysis Marginal analysis: The analysis of the benefits and costs of the marginal unit of a good or input. (Marginal = the next unit) Marginal Analysis A technique widely used in business decision-making and ties together much of economic thought. In any situation, people want to maximize net benefits: Net Benefits = Total Benefits - Total Costs The Control Variable To do marginal analysis, we can change a variable, such as the: quantity of a good you buy, the quantity of output you produce, or the quantity of an input you use. This variable is called the control variable . The Control Variable Marginal analysis focuses upon whether the control variable should be increased by one more unit or not. Key Procedure for Using Marginal Analysis 1. Identify the control variable (cv). 2. Determine what the increase in total benefits would be if one more unit of the control variable were added. This is the marginal benefit of the added unit. Key Procedure for Using Marginal Analysis 3. Determine what the increase in total cost would be if one more unit of the control variable were added. This is the marginal cost of the added unit. Key Procedure for Using Marginal Analysis 4. If the units marginal benefit exceeds (or equals) its marginal cost, it should be added. Key Procedure for Using Marginal Analysis Remember to look only at the changes in total benefits and total costs. If a particular cost or benefit does not change, IGNORE IT ! Why Does This Work? Because: Marginal Benefit = Increase in Total Benefits per unit of control variable ???TR / ??Qcv = MR where cv = control variable Why Does This Work? Marginal Cost = Increase in Total Costs per unit of c