MARGINAL

ANALYSIS
O Marginal analysis is an economic concept that
involves examining the incremental changes
in costs and benefits when making decisions.

O It helps determine the optimal level of an

activity by comparing the additional cost and
additional benefit of each unit.
O Marginal Analysis is a decision making tool
used to evaluate the incremental changes in
cost and benefits when making choices.
O Marginal Analysis is performed by comparing
marginal cost and marginal benefits for an
additional unit of good and service.
O The goal is to find the net benefits of the
additional unit of good / service, which is
found by subtracting marginal benefit and
marginal cost.
O Marginal benefits – marginal cost= net
benefits
 WHAT IS
MARGINAL
BENEFIT and
MARGINAL COST?
O Marginal cost
- represent the cost and producing or acquiring one more
unit of good / services.
- it helps to determine how much more you need to spend
to produce one additional unit.
O Marginal benefits
- represents the additional satisfaction or utility gained
from consuming one more unit of a good / services.
- marginal benefits , also known marginal revenue , is
the increase in total benefits as a result of a change in output of
a good one unit.
O Equilibrium Point:
Marginal analysis aims to find the equilibrium
point where MC equals MB. At this point, the
incremental cost of producing or consuming one
more unit is exactly balanced by the incremental
benefit gained from it. This is the point of
optimal decision-making, as further increases in
quantity would result in diminishing returns or a
situation where MC exceed MB.
 Decision-Making: Based on the comparison of MC and MB, you can
make informed decisions. There are three possible scenarios:

O If MB > MC - it generally advisable to increase

production / consumption because the additional
benefit outweigh the additional cost.
O If MC > MB, it's better to reduce production or
consumption because the additional cost exceeds the
additional benefit.
O If MC = MB, you are at the optimal level, and
further changes aren't recommended because they
won't improve the overall outcome.
O Here is a simple example of marginal analysis:
O Let's imagine their was a small coffee shop, and they considering adding another
type of coffee to their menu. Currently, they have one type of coffee priced at ₱100
per cup. Now, they want to add a premium coffee to their menu.
O Marginal cost (additional cost): To add the premium coffee to their menu, they need
to purchase more expensive coffee beans, which would cost an additional ₱30 per
cup of premium coffee.
O Marginal revenue (additional revenue): There market research suggests that they can
sell the premium coffee for ₱150 per cup.
O Now, using marginal analysis:
O 1. Calculate the marginal cost: ₱30 for each cup of premium coffee.
O 2. Calculate the marginal revenue: ₱150 for each cup of premium coffee.
O In this case, the marginal revenue (₱150) is higher than the marginal cost (₱30) for
each cup of premium coffee. Therefore, it's a good idea to add it to your menu
because it will contribute positively to your profit.
O Through marginal analysis, this can help their business assess the additional costs
and revenues of small changes in operations to make more meaningful decisions.
O Marginal cost (additional cost): To add the
premium coffee to your menu, you need to purchase
more expensive coffee beans, which would cost an
additional ₱30 per cup of premium coffee.
O Marginal Benefit /(additional revenue): Your
market research suggests that you can sell the
premium coffee for ₱150 per cup.
O To calculate the net benefit in this scenario, you need to compare the
total additional revenue generated from selling one more cup of
premium coffee (marginal revenue, MR) to the additional cost
incurred in producing that cup (marginal cost, MC).

Net Benefit = MR - MC

O MR (Marginal Revenue) = ₱150 per cup

O MC (Marginal Cost) = ₱30 per cup
O Now, calculate the net benefit:

O Net Benefit = ₱150 - ₱30 = ₱120 per cup

O The net benefit of producing and selling one more cup of premium
coffee is ₱120. This means that for each additional cup you sell, you
gain a net benefit of ₱120, taking into account the additional revenue
and cost associated with it.
EXAMPLE:

O Let's say you have a chocolate manufacturing business, and you

decide to add another variant of chocolate to your product lineup.
To do this, you need to purchase a special ingredient that is more
expensive than the common ingredients you use for your other
chocolates.
O Marginal cost (additional cost): The additional cost of producing
one bar of the special chocolate is ₱50 per bar, while your
regular chocolates have a marginal cost of ₱20 per bar.
O Marginal benefit (additional revenue): Market research suggests
that people are willing to buy the special chocolate, but the
additional revenue generated from it may not fully offset the
higher production cost. The revenue from each bar of the special
chocolate is only ₱30.
O In this example:

1. Marginal cost (MC) of the special chocolate: ₱50 per bar

2. Marginal benefit (MB) of the special chocolate: ₱30 per bar
Because the marginal cost (₱50) is higher than the marginal
benefit (₱30), it means that adding the special chocolate to your
lineup may not be a good decision because the production cost is
greater than the revenue it generates. This is an example of how
marginal cost is higher than marginal benefit in a decision or
project.
O To calculate the net benefit in this example where the marginal cost (MC) is higher than
the marginal benefit (MB), you subtract the MB from the MC. The net benefit represents
the difference between the additional revenue gained from the special
chocolate and the additional cost incurred in producing it. Here's how to calculate it:

Net Benefit = MB - MC

O Given values from the example:

O - MB (Marginal Benefit) of the special chocolate: ₱30 per bar
O - MC (Marginal Cost) of the special chocolate: ₱50 per bar

O Now, use the formula to calculate the net benefit:

O *Net Benefit = ₱30 (MB) - ₱50 (MC)
O = ₱30 - ₱50=- ₱20 per bar
O The net benefit is -₱20 per bar.

O A negative net benefit indicates that, in this scenario, adding the special chocolate to
your lineup results in a loss. The additional cost of production exceeds the additional
revenue generated, leading to a net loss of ₱20 for each bar of special chocolate
produced and sold.
WHY IS MARGINAL ANALYSIS IMPORTANT???

O 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.
O Marginal analysis is paramaount as it enables business owners
and managers to know in advance whether producing one more
unit is worth it.The analysis makes it possible to know whether
additional revenue because of increased production will exceed
cost leading to increased profitability.
THANK YOU!

REPORTERS;
OBNIALA, BEA BIANCA
PUTIAN, SHIELA MAE
BSAB 2D