MARGINAL

ANALYSIS
 Group 1 Members

• Chebet Mutai – xxxxx

• Abdiweli Mohamed - 664792
• Belvas Otieno - 664555
 Marginal Analysis

Marginal analysis examines how much more profitable

an activity is when compared to how much more
expensive it is. It is a technique for making decisions that
weighs the costs and advantages of the proposed course
of action in order to estimate the company's highest
possible profits.
 Marginal Benefit

Marginal benefit is the difference you receive when you

make a different choice. In business, this typically is the
additional revenue the company receives when it
increases production and/or sells more items.
 Marginal Cost

Marginal cost is the additional cost that you incur when

you produce additional units of a product. Marginal costs
typically decline as a company increasingly produces a
higher number of goods
 Example

Imagine that you’re out getting ice cream with your

friends or family. You can choose whether to buy one,
two, or three scoops of ice cream. One scoop costs $3.00,
two scoops cost $5.00, and three scoops cost $7.00.
 Example

What is the marginal cost of each scoop of ice cream?

 Example
The marginal cost of the first scoop of ice cream is $3.00 because
you have to pay $3.00 more to get one scoop of ice cream than you
do to get zero scoops of ice cream. The marginal cost of the second
scoop of ice cream is $2.00 because you only need to pay two
more dollars to get two scoops than you need to pay to get one
scoop. The marginal cost of the third scoop is also $2.00 because
you would need to pay an additional two dollars to get that third
scoop.
 Example

Scoops of Ice 1  2 3
Cream

Marginal Cost $3 $2 $2
 Rules of Marginal Analysis in Decision-
Making
The importance of marginal analysis in the
microeconomic analysis of decisions can be attributed to
two rules for profit maximization:

• Equilibrium rule
• Efficient allocation rule
 Equilibrium Rule
• An activity must be continued until its marginal cost
and marginal revenue are equal i.e., marginal profit is
zero. Profit can typically be increased by stepping up
the activity if marginal revenue exceeds marginal
expense.
• It states that units will be purchased up to the
equilibrium point, which is reached when a unit's
marginal revenue matches its marginal cost.
 Efficient Allocation Rule
• A task should be continued until each unit of effort yields
the same marginal return.
• A business with several products should divide a
commodity between two manufacturing processes so that
each produces the same marginal profit per unit. If this
objective is not accomplished, profit can be made by
directing more resources toward the activity with the
highest marginal profit and less toward the other.
 Applications of margin analysis

The two most common applications of marginal analysis

are as follows:
• Observed changes
• Opportunity cost of an action
 Observed changes
Managers can use marginal analysis to design controlled
experiments based on the observed changes of specific
variables. The tool, for instance, can be used to assess
how raising production by a specific percentage will
affect costs and profits.
 Opportunity cost
Managers regularly find themselves in situations where
they are required to make a choice among available
options. Marginal analysis helps to assess the ‘cost’ of
the option(s) not chosen.
 Limitations of marginal analysis (1/2)
• One argument against marginal analysis is that because
marginal data is typically speculative by nature, it
cannot accurately depict marginal cost and output when
making decisions. Given that most decisions are based
on average data, it occasionally fails to make the
optimum choice.
 Limitations of marginal analysis (2/2)
• Another drawback of marginal analysis is that
economic actors tend to base choices on expected
outcomes rather than actual outcomes.
 References
• https://corporatefinanceinstitute.com/resources/knowledge/economics/mar
ginal-analysis/
THANK YOU