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Marginal utility is based on the notion that individuals rarely face all-or-nothing decisions, that most of the time they are considering a little more or a little less of something when allocating their budget, time or other scarce resources. Economists use a number of marginal concepts. The marginal utility of a third slice of pizza is the change in satisfaction one gets when eating the third slice instead of stopping with two.
The marginal cost of one more unit of output a firm produces is the amount that total cost increases when the firm produces one more unit of output.
The general formula for computing a marginal item is the change in the outcome divided by the change in the number of inputs used to produce that outcome. Watch this lecture video clip to learn more about why when we consume even more of a good, the marginal benefit of that good decreases with each additional good. Answer the question s below to see how well you understand the topics covered in the previous section.
Instead of focusing on business output as a whole, the impact on the cost of producing an individual unit is most often observed as a point of comparison. Marginal analysis can also help in the decision-making process when two potential investments exist, but there are only enough available funds for one.
By analyzing the associated costs and estimated benefits, it can be determined if one option will result in higher profits than another. From a microeconomic standpoint, marginal analysis can also relate to observing the effects of small changes within the standard operating procedure or total outputs. These small shifts and the associated changes can help a production facility determine an optimal production rate. Managers should also understand the concept of opportunity cost.
Suppose a manager knows that there is room in the budget to hire an additional worker. Marginal analysis tells the manager that an additional factory worker provides net marginal benefit. This does not necessarily make the hire the right decision.
Suppose the manager also knows that hiring an additional salesperson yields an even larger net marginal benefit. In this case, hiring a factory worker is the wrong decision because it is sub-optimal. Because marginal analysis is only interested in the effect of the very next instance, it pays little attention to fixed start-up costs. Including those costs in a marginal analysis is incorrect and produces the so-called ' sunk cost fallacy '. When a manufacturer wishes to expand its operations, either by adding new product lines or increasing the volume of goods produced from the current product line, a marginal analysis of the costs and benefits is necessary.
Some of the costs to be examined include, but are not limited to, the cost of additional manufacturing equipment, any additional employees needed to support an increase in output, large facilities for manufacturing or storage of completed products, and as the cost of additional raw materials to produce the goods.
Once all of the costs are identified and estimated, these amounts are compared to the estimated increase in sales attributed to the additional production.
This analysis takes the estimated increase in income and subtracts the estimated increase in costs. If the increase in income outweighs the increase in cost, the expansion may be a wise investment. For example, consider a hat manufacturer. Each hat produced requires seventy-five cents of plastic and fabric. In this situation, increasing production volume causes marginal costs to go down. A marginal benefit or marginal product is an incremental increase in a consumer's benefit in using an additional unit of something.
A marginal cost is an incremental increase in the expense a company incurs to produce one additional unit of something. If you already spent an hour searching for a great parking spot, you may well do better to let that memory go. Thinking at the margin means to let the past go and to think forward to the next hour, day, year, or dollar that you expend in time or money.
If you think at the margin, you are thinking ahead. At some point, if you continue to drive around the block again and again with no results, an economist would encourage you to think about the future instead of bulleting on the past.
Thinking at the margin means weighing those future options, and not focusing on what you did in the previous hour of frustrating circling around.
The marginal cost of producing computer chips is the entire cost of producing one more computer chip. Producing only one more from your existing equipment and workers may entail only a small cost that is only an additional few pennies per chip. But if you are already maxing out your production, producing even one more may entail producing a hundred thousand more. Which in turn may entail building a new factory and hiring all its workers, or even researching a whole new way to produce chips—perhaps an additional hundred thousand dollars, at an average cost of a dollar per additional chip or even an additional few million dollars.
You have to consider all the additional costs for each option before making a decision. Maybe to get just one more chip you still have to pay extra to hire an extra worker to work the night shift, plus hire someone to stand by to do a little more machine maintenance. The sum of all those additional costs—from wages to insurance to taxes to emotional burdens and effects on morale—to produce one more computer chip is what economists mean by the marginal cost of a computer chip.
On a hot day, that first blast of cold air as you step into an air conditioned store gives you a tremendous boost. Each succeeding few minutes, though, may give you less pleasure. Economists say your marginal pleasure or marginal utility —your marginal benefit— diminishes as you experience more. For example, suppose you make sneakers and you have a company division that makes gold-colored sneakers with specialty soles and that division has turned out not to be the big money-maker you hoped.
Or maybe that division is breaking even but would be the first division you would cut unless it starts to show more signs of promise. You might refer to that division as being marginal.
Opportunity cost is from the perspective of a buyer, while marginal cost is from the perspective of a seller or producer.
Marginal cost refers to what a seller or producer has to sacrifice in order to sell or produce one more item. It would be some small number—say, an additional 5 cents in interest you might gain, plus some psychological marginal benefit—say, something you value at 2 cents—in terms of additional feelings of security. If you plot a curve between the benefits and costs, the slope is.
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