Marginal analysis helps a firm to determine the most equitable allocation of a firms resources (C).
EXPLANATION
Definition of Marginal Analysis
Marginal analysis is an examination of the additional benefits of an activity compared to the additional costs incurred by the same activity. Companies use marginal analysis as a decision-making tool to help them maximize profit potential. Marginal refers to the focus of the next unit or individual cost or benefit, for example, the cost of producing one widget or profit obtained by adding one more worker.
How Marginal Analysis Works
Marginal analysis is also widely used in microeconomics when analyzing how complex systems are affected by marginal manipulation of the variables that comprise. In this case, marginal analysis focuses on examining the results of small changes as effects that flow throughout the whole business.
Marginal analysis is an examination of the associated costs and potential benefits of certain business activities or financial decisions. The aim is to determine whether the costs associated with changing activities will produce sufficient benefits compared to expenditures. Instead of focusing on overall business output, the impact on individual unit production costs is most often observed as a point of comparison.
Marginal analysis can also help in the decision making process when there are two potential investments, but only one fund is available. Done by analyzing related costs and estimated benefits, it can be determined whether one option will generate a higher return than another.
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If you’re interested in learning more about this topic, we recommend you to also take a look at the following questions:
• What would marginal analysis put an emphasis on?
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KEYWORD: Marginal Analysis, Firm, Cost.
Subject: Business
Class: 10 - 12
Subchapter: Marginal Analysis
