Marginal analysis

A concept employed constantly in microeconomic theory (and quite frequently in macroeconomic theory as well) is that of the marginal change in some economic variable (such as quantity of a good produced or consumed), or even the ratio of the marginal change in one variable to the marginal change in another variable. A marginal change is a proportionally very small addition or subtraction to the total quantity of some variable. Marginal analysis is the analysis of the relationships between such changes in related economic variables. Important ideas developed in such analysis include marginal cost, marginal revenue, marginal product, marginal rate of substitution, marginal propensity to save, and so on. In microeconomic theory, "marginal" concepts are employed primarily to explicate various forms of "optimizing" behavior. (Consumers are seen as striving to maximize their utility or satisfaction. Firms are seen as striving to maximize their profits.) The maximum value of such a variable is found by identifying a value of the independent variable such that either a marginal increase or a marginal decrease from that value causes the value of the dependent variable being maximized to fall. (The student of mathematics may recognize the opportunity to apply concepts from differential calculus here, with the various marginal concepts being special names given to first derivatives of particular functions.) The valuation of the benefits (utility) and the costs of any good is determined "at the margin." For the (individual or collective) decision maker pondering how many units of a good to consume or provide to the market, net total benefits (benefits minus costs) will always be maximized at that level of consumption (or provision to the market) where the marginal benefit derived from adding the last unit equals the marginal addition to total costs of producing or acquiring that last additional unit.

[See also: optimum, cost]