Economic Analysis A Primer Name Marginal analysis Marginal

Economic Analysis, A Primer Name

Marginal analysis • Marginal analysis states that – As actions change, so do the benefits of a decision – People should ideally choose correct action

Marginal costs and marginal benefits • To appropriately assess marginal analysis – Costs (marginal costs) must not outweigh benefits (marginal benefits) – Do the action until the costs equal benefits, then stop – After this point, costs will be too expensive

Marginal costs • Producing goods costs ‘money’ – Here, money means cost • Producing more goods costs more money • Increasing production by one more good costs one more unit of money • This is known as “marginal cost” Sullivan, 2003

Marginal benefits • As before, marginal benefits are determined by consumer – Customer willing to pay five dollars – Item cost three dollars – Marginal benefit equals two dollars

Marginal analysis--economics • Marginal analysis important to economics – People want to be satisfied – Businesses want to maximize profit • Marginal analysis helps determine the balance of adding one more action Hall, 2010

Marginal analysis—goods & services • Marginal analysis alters the prices for goods and services – This determined by consumer – Customers will not pay an infinite sum for goods or services of interest – Businesses use theory of marginal cost to help them set a price people are willing to pay

Marginal analysis—efficiency & equity • Products cost different amounts across the country – Florida = demand for swimsuits; can be made quickly and cheaply – Fargo = demand for swimsuits; can be made more costly as only a few needed • Equity comes in to play because all people want the option to choose

Marginal analysis--economy • Marginal analysis drives the economy – People only willing to spend money on desirable goods – Affect the ultimate cost – Companies want to maximize profit without losing money – Offer goods at highest prices without being too expensive

Marginal analysis--example • Individual may want to know if they should work an extra hour • He makes $10/hour • For each increase in pay, consider the amount of cost • Person may choose to work 2 extra hours but not three as costs get too high (fatigue, overwork, time away from family, etc. )

References • Sullivan, A. , Sheffrin, S. (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 111.