Marginal Analysis

Definition

Marginal analysis involves examining incremental changes in costs and benefits to make decisions. It compares the additional benefit gained from an action to its additional cost.

Analogy

Imagine you have $10 to spend at a carnival. You could either buy 5 tickets for $2 each or 4 tickets for $2 each plus some cotton candy for $2. By comparing the marginal benefit (the extra ticket) to its marginal cost ($2), you can decide which option gives you more value for your money.

Related terms

Marginal Cost: Marginal cost refers to the change in total cost resulting from producing one more unit of output.

Marginal Revenue: Marginal revenue represents the change in total revenue resulting from selling one more unit of output.

Sunk Cost: Sunk costs are expenses that have already been incurred and cannot be recovered. They should not be considered in marginal analysis because they are irrelevant to future decision-making.