What Is Marginal Analysis?

Marginal analysis is the observation, measurement, and analysis of the marginal cost, marginal income, and marginal profit of alternatives in order to make the best choice. The difference between marginal income and marginal cost is marginal profit. When the marginal revenue is greater than the marginal cost and the marginal profit is positive, the total profit of the enterprise will increase with the increase in production and sales; while when the marginal revenue is less than the marginal cost and the marginal profit is negative, the total profit of the enterprise will be determined by the production and sales volume. Increase and decrease, even loss. That is to say, only when the marginal income equals (or approaches) the marginal cost and the marginal profit equals (or approaches) zero, the total profit of the enterprise will reach the maximum value. It can be seen that the results of the marginal analysis and the quantitative relationship between the marginal revenue and the marginal cost revealed by it are an important basis for determining the optimal production and sales scale of the product. This decision analysis method can be applied to decisions such as product production and product pricing. ^[1]

Marginal Analysis

Marginal analysis is

Determination of optimal input amount under unconstrained conditions

Profit maximization is the fundamental goal of enterprise decision-making. The basic principle of calculus is known: the point where the profit is maximized is obtained at the point where the marginal profit is equal to zero. Profit (or net income) is the difference between income and cost. Marginal profit is the difference between marginal income and marginal cost, that is: MB = MR-MC.

From this, it can be concluded that as long as the marginal income is greater than the marginal cost, this economic activity is desirable; under unconstrained conditions, when the marginal profit value is 0 (that is, marginal income = marginal cost), the resource input is optimal ( Most profitable).

Determination of optimal business volume allocation under constraints

For constrained situations, the following optimization rules can be obtained: under constrained conditions, the marginal benefits brought by each increase in unit resources in all directions are equal, and at the same time meet the constraints, the total benefits of resource allocation are optimal. This law is also called the law of equal margins.

When the resource under consideration is capital, the constraint optimization rule is: while satisfying the constraints, each marginal benefit of each dollar increase in all directions is equal; if the capital is used to purchase resources, each The resource prices in each direction are constant, and the constraint optimization law is: while satisfying the constraint conditions, the ratio of the marginal benefits to prices in all directions is equal to a constant.

Discrete results of the optimization principle

When the marginal benefit is greater than the marginal cost, action should be increased; when the marginal benefit is less than the marginal cost, action should be reduced; the optimization level is reached at a level when the marginal cost is greater than the marginal benefit.

Promote the use of incremental analysis

Incremental analysis is a variant of marginal analysis. Incremental analysis is the analysis of the impact of a decision on revenue, cost, or profit. "A certain decision" here can be a large number of changes in variables, including discrete and jumpy changes, or non-quantitative changes, such as comparisons under different technical conditions and different environments. Compare the variable changes caused by different decisions for analysis.

The application of the marginal analysis method in management decision-making is equivalent to the establishment of a set of evaluation systems conducive to decision-making: not only the total value of the variable Total, but also the average value of the variable and the marginal value Marginal. The total, average, and marginal values have the following relationship (total-average-marginal relationship):

1) The sign of the marginal value is a signal that the total value rises or falls;

2) When the marginal value is greater than the average, the average is increasing.

If possible, mathematically derive the above conclusions and refine the text description of the conclusions, which can deepen the understanding and application of the conclusions. Pay special attention to 4 important points: the break-even point, the point of maximum profit, the point of average profit, and the point of total profit.

The application of the marginal analysis method also implies an idea: make full use of and promote the development of information resources.

In applying the marginal method or optimization method, the following complex factors should also be noted:

1. Real economic management issues are always inextricably bound up, there are multiple variables, we must strive to grasp the main variables, and meet the marginal laws in all directions;

2. The relationship between decision variables and related results is complex. Whether the selected variables are appropriate must be combined with quantitative analysis and qualitative analysis, and subjected to inspection processing such as equation regression, curve fitting, and significance test;

3. Note that there are various constraints and the application conditions of mathematical tools for the problem under consideration;

4. Pay attention to the uncertainty and risks in decision-making.