Marginal analysis is a general business and economics term describing a process of comparing a one-unit incremental cost increase of an activity with a corresponding increase in benefits. In business, managers use marginal analysis to determine the level at which they should stop incurring more costs in order to generate the most revenue. It is one of many tools used to maximize profits.
In economics, marginal analysis is used to study consumer and producer habits in order to predict future economic behavior. Using this type of analysis, economists are able to predict the effects of government initiatives targeted to help maintain a healthy economy.
There are many different types of marginal analysis, such as consumer marginal benefit analysis, the marginal propensity to consume, the law of diminishing marginal returns, and the marginal cost of production. Even taxes are subject to marginal analysis through the study of marginal tax rates and their effect on economic activity.
Marginal analysis even happens on the individual level, often without the individual being aware that she’s doing marginal analysis. For instance, Mary jogs three miles a day, five days a week. She’s considering adding a sixth day. Unbeknownst to her, she uses marginal analysis when she compares the additional health benefits from one more day of jogging versus the costs, such as loss of leisure time for that additional day and the additional wear and tear on her legs and knees.
In This Series
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Small BusinessFind out how your startup's gross margin can impact your business, including why a mediocre margin may spell disaster for a budding business.
InsightsLearn how declining profit margins have foretold nearly every recession of the past 50 years, and analyze whether they may signal economic contraction in 2016.
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