CandleFocus

Marginal Analysis

Candlefocus Editor
Marginal analysis is a concept or tool applied in economics, business studies and decision-making that allows decision-makers to evaluate the potential cost savings or profitability of a single unit (or marginal) of something, such as a product or service. This analysis is done in order to understand the decision’s potential impact on the organization’s overall costs, profits and/or other metrics. With this analysis, a single unit is compared to any additional units that could be created or sold, and the benefits and/or costs associated with the decision of creating or selling additional units is then reviewed and evaluated.

Decision-makers can utilize marginal analysis in considering the potential costs and benefits of any changes to their operations, such as increasing staff, making changes to the production processes, increasing the use of technology, or introducing new products. By understanding the differences in costs and benefits associated with any changes, a decision-maker can decide whether the change should be implemented. For example, if a manufacturer is considering increasing the number of workers in its firm but notices that the marginal cost associated with hiring each new worker is much higher than the marginal benefit of the same hire, a rational decision-maker can conclude that the hire isn’t worth making.

Ultimately, marginal analysis is used to determine an optimal decision or action by understanding if the marginal costs associated with the decision outweigh the marginal benefit or vice versa. The chosen decision must bring higher potential benefit to the organization than the cost associated with it, otherwise it doesn’t make sense to pursue the change. Understanding and applying marginal analysis can help organizations make more efficient decisions, strive for useful cost savings and ultimately, increase their profits.

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