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Marginal Analysis: Marginal Cost v. Marginal Benefit

The document discusses the concepts of marginal cost and marginal benefit and how businesses and individuals can use marginal analysis to determine the optimal quantity or amount of a good or activity by comparing the marginal benefit of increasing production or participation to the marginal cost. It provides examples of how marginal analysis can help determine how many hours a candy store should stay open each day or how clean one should make their room by weighing the marginal benefits versus the marginal opportunity costs.

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Rashe Fasi
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107 views14 pages

Marginal Analysis: Marginal Cost v. Marginal Benefit

The document discusses the concepts of marginal cost and marginal benefit and how businesses and individuals can use marginal analysis to determine the optimal quantity or amount of a good or activity by comparing the marginal benefit of increasing production or participation to the marginal cost. It provides examples of how marginal analysis can help determine how many hours a candy store should stay open each day or how clean one should make their room by weighing the marginal benefits versus the marginal opportunity costs.

Uploaded by

Rashe Fasi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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MARGINAL Marginal Cost v.

ANALYSIS Marginal Benefit


TODAY’S OBJECTIVE
After today’s lesson, students will be able to…
 Understand and distinguish between the two types of
economic decisions
 “Either-Or” and “How Much” decisions
 Understand the method of economic decision making
 Weighing the costs and benefits of any activity before undertaking that activity

 Essential Skill:
 Demonstrate understanding of concepts
“EITHER-OR” OR “HOW
MUCH”
The state government is considering whether to build a public library or a new elementary
school.
 “Either-Or” Decision

Executives at Apple Computer are debating whether or not to produce an additional 300,000
IPhones this year
 “How Much” Decision

You have been accepted into the Peace Corp and will be posted to the Czech Republic. You
must now decide whether to join the Peace Corp or to go to school full time at the University
of Florida
 “Either-Or” Decision

You are deciding whether to cut back your 30-hour work week to 20 hours so that you can
take an evening class at your local college.
 “How Much” Decision

The price of tuition at your community college has gone up. You’re considering taking less
credits.
 “How Much” Decision
MARGIN
The margin is defined as “the next step”
 It could be an incremental step (a little bit more) or a
detrimental step (a little bit less)

The principle of marginal analysis is use to


answer the “how much” question.
MARGINAL ANALYSIS
INVOLVES
COMPARING
The benefit from the next step which is called
Marginal Benefit

WITH

The cost of taking the next step which is called the


Marginal Cost
MARGINAL ANALYSIS
If Marginal Benefit > Marginal Cost
 The activity yields a Net Marginal Benefit

If Marginal Benefit < Marginal Cost


 The activity yields a Net Marginal Cost

If Marginal Benefit = Marginal Cost


 You have reached the optimal quantity
THE RULE OF MARGINAL
ANALYSIS
The optimal quantity is the quantity at which:

Marginal Benefit = Marginal Cost


or
Marginal Benefit > Marginal Cost
APPLYING MARGINAL ANALYSIS
Example 1:
Jerry owns a candy store. The store's revenues depend on the number
of hours the store is open each day as shown in the Table below. The
cost of staying open each hour is $10. If Jerry follows the marginal
principle, how many hours each day should he keep his store open?

Hours Total Revenue


Open (Total Benefit)
$
0 0
1 25
2 45
3 60
4 70
5 75
6 79
7 81

8
Solving the problem
Step 1: Determine what is the marginal benefit?

The marginal benefit is the marginal revenue or


incremental revenue.
Hours Total Revenue Marginal
Benefit
Open (Total Benefit)
$ (∆ Total Benefit)
$

0 0 0
1 25 25
2 45 20
3 60 15
4 70 10
5 75 5
6 79 4
7 81 3

9 9
Step 2: What is the marginal cost?

The marginal cost is what Jerry has to pay to keep the store
open for each additional hour.

Hours Total Revenue Marginal Marginal


Benefit Cost
Open (Total Benefit)
$ (∆ Total Benefit)
$ $

0 $0 0 0
1 25 25 10
2 45 20 10
3 60 15 10
4 70 10 10
5 75 5 10
6 79 4 10
7 81 3 10

10 10
Step 3: Compare the marginal benefit and the marginal
cost for each hour that the store is open to determine if
Jerry should keep
it open.
Hours Total Revenue Marginal
Benefit Marginal Net Marginal
Open (Total Benefit)
$ (∆ Total Benefit) Cost Benefit/Cost
$ $ $

0 $0 $0 0 0
1 25 25 10 25-10 = 15
2 45 20 10 20-10= 10
3 60 15 10 5
4 70 10 10 0
5 75 5 10 –5
6 79 4 10 –6
7 81 3 10 –7

11 11
The optimal number of hours is 4. For the 4th hour,
marginal benefit equals marginal cost.

Hours Total Revenue Marginal


Benefit Marginal Net Marginal
Open (Total Benefit)
$ (∆ Total Benefit) Cost Benefit/Cost
$ $ $

0 0 0 0 0
1 25 25 10 25-10 = 15
2 45 20 10 20-10= 10
3 60 15 10 5
4 70 10 10 0
5 75 5 10 –5
6 79 4 10 –6
7 81 3 10 –7

12 12
CLEANING YOUR ROOM
Your room is dirty
Let’s clean it.
How clean?
What are the benefits of different degrees of clean?
What is the marginal opportunity cost?
HOW MUCH OF A
PARTICULAR
ACTIVITY?
Pursue activities as long as the marginal benefit
exceeds the marginal opportunity cost
Pursue activities up to the point where: MB = MOC
If the marginal benefit of another unit of the activity
is greater than the marginal opportunity cost, go for
it!
If the marginal benefit of another unit of the activity
is less than the marginal opportunity cost, stop!

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