Marginal Analysis

6 04 2011

What is marginal analysis?  Marginal analysis aids in the decision-making process because it allows you to compare the most important variables.  Those variables include price, quality, warranty, etc.  Marginal analysis also helps you examine what you gain by making such a decision to buy.

Two important factors in marginal analysis are marginal utility and marginal cost.

  • Marginal Utility is the extra satisfaction derived from having one or more incremental unit of a service or product. 
  • Marginal Cost is the additional cost of one or more incremental unit of an item. 

As you review the marginal utility and cost of an item, think about what you really gain and at what cost.  The marginal utility of purchasing front row seats at a football game equates to having a better view of the players and field.  There would be more leg room and probably extra catering services that you would not have if you were sitting anywhere else.

The marginal cost would be the difference in price between front row seats and the less desirable seats in the bleachers.  However, the marginal cost might be too expensive and conflict with your budget for the month.  The cost of front row seats might be as high as $100, compared to the $45 price tag for bleacher seats. 

Conducting marginal analysis in everyday life will simplify your decision-making.  Also, it will aid in deciding between how much satisfaction an item or service will bring you compared to the extra money it will cost.  Keep a sheet and write down the pros and cons of both the utility and cost.  Weigh your options based on the cost and see if it fits into your budget and lifestyle.




Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: