The Concept of Margin

Section 1: Understanding the Concept of Marginal Analysis

• In economics, any decision-making process involves considering the impact of a small or incremental change from the current situation. This is known as marginal analysis.

• The term ‘margin’ refers to small incremental adjustments to an existing plan of action.

• Marginal changes are adjustments to an existing course of action made incrementally, in response to the principle of benefit versus cost.

Section 2: Marginal Cost

• Marginal cost (MC) refers to the change in total cost that arises when the quantity produced changes by one unit.

• The concept of the marginal cost is critically important in resource allocation because it shows how much of an additional quantity of the good or service the firm can produce without increasing costs proportionately.

• Under perfect competition, a company continues to produce where the marginal cost equals the marginal revenue (MC=MR) to maximise profit.

Section 3: Marginal Revenue

• Marginal revenue (MR) is the increase in revenue that comes from selling one more unit of the good or service.

• If the price received for selling one more unit exceeds the marginal cost of producing it, companies should increase production until the marginal cost equals the marginal revenue.

Section 4: Marginal Utility

• In the context of consumption, the margin refers to the additional satisfaction or utility that a consumer gets from consuming one more unit of a good or service. This is known as marginal utility (MU).

• The law of diminishing marginal utility states that as more of a good or service is consumed, the added satisfaction received from consuming one more unit will eventually decline.

• Consumers maximise their satisfaction when the marginal utility per pound spent on all goods and services is the same. This is known as the equimarginal principle.