Marginal Analysis and how it is used in the world of economics - Essay Example

Perhaps, it is the most important concept in the analysis of economic activities. The marginal analysis theory states that individual should make a decision based on the incremental gains and losses that emerge from that decision. In a simplistic term, the marginal analysis balances the additional costs and benefits, derived out from taking a decision. Be it a student deciding whether to revise the chapters once more, or a producer whether to expand or stop production, optimal choice requires that costs and rewards should be equilibrated on the margin.

Till the time additional benefit exceeds additional cost, the individual or the firm has to continue taking action so as to ensure that all excess benefits are accrued and vice versa. (Washington State University, N.D.). Marginal analysis is the study of the costs and benefits of the next unit of a good or a factor of production. The aim of the individual or a firm is to maximize net benefits (NB), which is equal to total benefits (TB) less total costs (TC). (i.e., NB=TB-TC). In order to obtain the marginal change, we can change the control variable, say, quantity of goods purchased, amount of goods actually produced, quantity of an input used, etc.

Marginal analysis focuses upon whether the control variable should be increased/decreased by one more units or not. The two concepts through which the marginal analysis is done are marginal costs and marginal benefits. Marginal costs are the addition to total costs if one additional unit of the control variable is added. On the other hand, marginal benefits are the addition to the total benefits if the control variable increases by one additional unit. When the marginal benefit rise above marginal costs, the net benefits rise with every unit increase in the control variable.

Therefore, more marginal units of the control variable should be added till the marginal costs and marginal benefits are equalized. On the other hand,