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Econ: What is Marginal Analysis? 7 Views


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What is Marginal Analysis? Marginal analysis is the comparison and weighing of supplementary benefits to supplementary costs when evaluating a new product, service or process being proposed to be added to a business.

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Transcript

00:00

And finance Allah shmoop what is marginal analysis All right

00:07

people You know that moment the one when you think

00:10

just one more One more cookie One more cup of

00:14

coffee One more bite and then just one more And

00:17

you know one more until you realize that one more

00:20

one more time maybe is not such a good idea

00:22

when you're having that just one more moment Economists call

00:26

this thinking on the margin The margin is just when

00:30

you add one more For instance your marginal benefit of

00:34

just one more cookie after you've already had one is

00:36

probably still maybe net positive But after you've had ten

00:40

cookies and your stomachs of rumbling saying What are you

00:43

doing to me Why to which you say I'm a

00:45

slave to my taste buds What's it to you Stomach

00:49

When the cost of just one Mohr outweighs the benefits

00:52

it's usually time to call it quits Well marginal analysis

00:55

is when we look at things from this perspective by

00:57

asking what would happen to the output if we added

01:00

just one Mohr input Well our cookie examples an example

01:03

of the law of diminishing marginal returns which is just

01:07

one way we can use marginal analysis diminishing marginal returns

01:11

It's when we get less and less benefit from the

01:14

same input So we get less and less enjoyment from

01:17

each cookie with each additional one that we eat until

01:19

eventually It's enjoyable anymore Like your digestive system can only

01:23

handle so much Marginal analysis has used everywhere when we

01:26

look at consumers consuming when businesses air trying to minimise

01:29

costs and when governments air tinkering around with the financial

01:32

models on howto incentivize us Teo do things any time

01:36

you see the word marginal Like in marginal cost of

01:39

production and marginal propensity to consume it refers to thinking

01:44

on the margin when the input changes a tiny bit

01:47

Well how does that affect the output in it What

01:49

rate for instance marginal propensity to consume asks when consumers

01:54

have more disposable income in their pockets How much more

01:57

money are they in fact spending well as opposed to

02:00

investing it or hoarding it under your mattress Because you

02:03

forgot inflation was a thing Oops What marginal analysis is

02:06

important for firms as well as cookie eaters Firms want

02:09

to make just one more just one more Just one

02:12

more of whatever they're selling like say a waffle irons

02:15

that make keyboard shaped waffles until they stopped making money

02:19

selling them the keyboard shaped waffle iron Producers find that

02:22

sweet spot where marginal costs equal marginal revenue which is

02:26

where the cost of just one more waffle iron equals

02:30

the revenue they make by selling that one more waffle

02:33

iron right If they go below it like they can't

02:35

sell it well then there actually losing money producing more

02:38

waffle irons Well just like when you ate cookies you

02:41

basically ate them until your marginal cost equalled your marginal

02:44

benefit As long as the marginal benefit is higher than

02:46

the marginal cost it's hard to say no to the

02:48

cookies whispering your name from the sugar stores in the

02:51

kitchen But when all of a sudden you realize eating

02:54

one more cookie is going to do more harm than

02:56

good when your marginal costs of just one more cookie

02:59

is higher than your marginal benefit of just one more

03:02

cookie well then you call it quits Unless you're a

03:04

mascots they want then your marginal cost Might it also

03:06

be benefits But we'll save that complication for Advanced Micro

03:09

economics The government uses marginal analysis on a mega scale

03:13

in the aggregate as economists say like when the Fed

03:16

is in the Federal Reserve lowers interest rates Jost a

03:19

smidge of a percentage making borrowing money cheaper to try

03:23

to get people to borrow just a smidge more Right

03:26

Okay well marginal analysis is all about tinkering at a

03:29

little more Take away a little less to see what

03:31

happens next time Your tinkering well maybe with deciding how

03:35

many keyboard shaped waffles you should make with your new

03:38

keyboard Waffle Iron Well just remember now you're thinking like 00:03:41.543 --> [endTime] an economist tasty

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