Marginal Analysis


Introduction

Almost everybody will have and also need to deal with economics in their life, not only personal economics of funding the purchase of their house and car but also at work persuading managers to take certain projects usually resorting to the proof of making money. One of the earliest principles of microeconomics you will learn is marginal analysis. When you google this the definition you get is

Marginal analysis is an examination of the additional benefits of an activity compared to the additional costs incurred by that same activity

Which I believe is one of the most confusing definitions for a simple model i've ever heard and could deter someone from trying to understand the topic. Here I would like to cover the basics of marginal analysis, what it means and then hopefully create a better definition.

Marginal Analysis

Marginal analysis is made up of two main sections "Marginal Cost" and "Marginal utility" also called "Marginal benefit" and I'd like to discuss what they mean here:

Marginal Cost

Marginal cost covers how the cost of something changes based on an increase in consumption. In other words how the cost of something changes based on a change in quantity. For many things in a manufacturing environment costs continue to go down with the manufacturing capability and thus marginal cost drops over quantity. Thinking about other applications such as a plane company the marginal cost of a plane to fly one person is high but each additional person has a low marginal cost until they cannot fit any more in the plane and a larger plane is required. This example is shown in Table 1 below:


Table 1: Plane marginal cost example.

Hopefully you can see what described above, an attempt at a definition of marginal cost could be "The analysis of cost per extra unit".

Marginal utility/benefit

Marginal utility covers how the utilisation or benefit of something changes based on an increase in consumption. This may seem similar to marginal cost, as it is. The only difference is instead the comparison of usefulness instead of cost in a scenario. Here we may think about a situation around the quantity of planes to fly from Heathrow to Charles de Gaulle. A single plane would be able to fill with ease but with more planes the availability would be more than the quantity of people wanting to fly losing its utility or benefit. Again this is shown below in Table 2:


Table 2: Plane marginal utility/benefit example.

Again, hopefully you can now see the simplicity of marginal utility and again, an attempt at a definition of marginal utility could be "The analysis of utilisation or benefit per extra unit".

Conclusion

Hopefully you can now see that there's nothing complex about marginal analysis and you may now see that marginal in this context simply means with a small addition, similar to delta leading to differentiation in mathematics. Thus a more understandable definition could be "The anaylsis of cost and benefit per extra unit of something in a business".