Posted in Marketing and Strategy Terms, Total Reads: 501
Definition: Marginal Analysis
Marginal Analysis is a measure of the added benefits to an activity as and when compared to the added costs of that activity. Many companies use this analysis as a tool of decision-making so that they can maximize their profits. We individuals also use the marginal analysis in our everyday life unconsciously to make the decisions.
In other words, it is the process of identifying the costs and benefits of various alternatives by evaluating the incremental effect on the total cost and total revenue caused by just a small change in the input or output of each alternative.
Marginal analysis is now being widely used in microeconomics also to analyze how affected can a complex system be just by marginally manipulating the compromising variables.
For an example, if you have already exercised say 3 days in a week and you may be thinking to add 4th day, you can use the approach of marginal analysis to determine whether these added benefits of the 4th days like gained endurance, burnt calories, muscle built would be worth the costs of the fourth day like giving sleep for it, having less energy to do other activities in that day and obviously increasing the risk of injury. Marginal analysis can also be observed when a company decides to increase the capacity of its plant. The Company has to choose between the marginal cost of installing new machines or adding new plant versus the marginal benefits of extra revenue that will be generated for the increase production.