Marginal Analysis: Optimal Decisions and Estimation Techniques

Introduction

Speaking on the issue of the marginal analysis, it is necessary to point out that it is frequently used in both the microeconomic and macroeconomic theory to evaluate the marginal change in any economic variable. The economic variable is usually regarded as a quantity of a well produced or consumed. The marginal analysis is also used “to examine the ratio of the marginal change in one variable to the marginal change in another variable” (Jones, 2005).

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It must be noted that a marginal change is a comparatively subtraction of the total quantity of any particular variable. Therefore the marginal analysis itself analyzes and evaluates the correlations between the above mentioned changes in the related economic variables themselves.

The basic subdivisions of the marginal analysis are:

  • The marginal cost;
  • The marginal product;
  • The marginal revenue;
  • The marginal propensity to save;
  • The marginal rate of substitution.

Discussion

If regard those marginal subdivisions in context of the microeconomics, it important to note that they are generally used to explicate various typical and non typical forms of the optimizing behavior. The concept of the optimizing behavior lays on the assumption of that the consumers should be seen as the objects who strive to maximize their own utility or satisfactory feelings. Responding to the previous group, the firms and the companies are regarded as the objects which strive to maximize their own profits, and thus, make the consumers to purchase their products the highest quantity that it is possible.

With the respect to the above provided information, “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” (Sloman, Norris, 2005). Following this, it is important to explain that the benefits are usually regarded as the utility.

Therefore, the valuation of the utility and the costs of any particular well product are likely to be defined at the margin. For both the individual and the collective decision, the decision maker should ponder, how many units of any well product to consume or represent to the market.

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Here, it can be seen that the net of the total utility or the utility minus costs is usually maximized at that stage of the consumption or the representation 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” (Swann, Mc Eachern, 2003).

The entire marginal cost analysis lays on the assumption that all of the world resources are limited, thus the consumers as well as the firms, can not have everything that they just want at one time. This leads to that the hard choices should be made by those categories of objects.

Another important issue here is the concept of the opportunity cost, which defines that each single time that they make a choice to purchase some product or service, some other product or service should be given up. The economics itself and the marginal analysis provide both the consumers and the firms with a set of special schemes and tools that might be useful for them in making better choices. Therefore, the best way to draw up the most resultant decision is to compare the marginal benefits or the utilities with the marginal costs.

In order to be able to do this, one should explain what the utilities, utilitarianism and marginal cost are. The term utility is based on the utilitarianism which can be regarded as the base for the entire economic theory. The utilitarian philosophy is based on the assumption of “the greatest good for the greatest number” (Jones, 2005).

So, basically, the key idea of the utilitarianism is the ultimate aim of the maximizing social welfare. In different times the choice winch should be made in accordance with this theory fits it easily, but sometimes hardly. In order to make this clearer, it would be relevant to provide the examples of the economic choices that different people make in the real world and in the real life.

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The example of the consumer choice that easily fits the utilitarianism theory might be represented as follows, when the consumer decides what model of some new car to purchase, she or he must purchase the car that she or he likes the best of all the provided ones, but so long as that particular car which the consumer likes is within his or her budget. Simply saying, the consumer might maximize the utility by the way of purchasing those things which she or he likes the best of all other things.

Contrary to the previous one, the given real life example is really hard to apply to the utilitarianism ideas. Consequently, the question of whether the health care should be forbidden to the elderly ones, so that the young people can receive the better health care, raises if try to fit this case to the utilitarianism principles. Thus, it is possible to state that this theory’s principles actually determine and quantify the term of the so called well product. But, of course, in order to be able to understand the given problem and find some solution to resolve it, it is necessary to undertake the key principles and ideas of the marginal costs and marginal benefits.

Therefore, one can suggest the following explanation of the marginal costs: basically, they are the additional (extra) costs that should be spent, when one more unit of any product is produced. For example, if the cost of making nine cakes is ninety dollars, then the cost of making ten cakes would be one hundred and ten dollars, consequently, the marginal cost of the tenth cake production would be evaluated as twenty dollars.

In order to understand the relationship between the economic processes of the production, the marginal costs and the total costs; and understand the reason of why the total costs tend to rise as the production process increases while the marginal costs might not rise at all, the following table, based on the constructional and calculating methods of J. Taylor and L. Frost (2002), can be introduced:

quantity total cost marginal cost
0 0
1 5 5
2 10 5
3 17 7
4 25 8
5 34 9
6 44 10
7 58 14
8 73 15
9 90 17
10 110 20

After analyzing the above provided table, it is possible to draw a conclusion that the marginal costs are likely to raise with the increment of the production process, because of the reason when a firm or a company’s grows is very large, it becomes really hard to manage the organization and evaluate the costs rise. There is also another explanation of the given phenomenon which states “that producing more and more of a particular product becomes more difficult due to technology or resource limitations” (Sloman, Norris, 2005).

For example, when trying to clean up the water in the lake, the first steps of this procedure are relatively inexpensive. There can be made a law banning the pollution of the water and imposing sanctions on those who violate it. But if trying to make the water in the lake cleaner and cleaner, much more expenses are required, like the advanced cleaning technology, thus, the marginal costs rise.

Following this, it is important to explain, what the marginal benefits actually are. They are the additional (extra) benefits received from the economical operation, when one more unit of product is released. I accordance with such credible scholars in the microeconomics field as D. Mc Taggart, C. Findlay and M. Parkin, “Benefits can be expressed in terms of units of utility or satisfaction, or sometimes they can be expressed in dollar amounts” (Mc Taggart, Findlay, Parkin, 2003). Here it would be relevant to provide with the table example tracing the marginal and total benefits from, the already mentioned in the previous table, cakes’ consuming, where the utility production units are represented in the dollar terms:

quantity total benefits marginal benefits
0 0
1 30 30
2 55 25
3 75 20
4 90 15
5 103 13
6 113 10
7 121 8
8 126 5
9 130 4
10 132 2

Conclusion

After analyzing all of the above provided information and creating the two explanation tables, one can firmly assert that the marginal benefits are likely to decrease as a good’s or service’s consuming increases. On the example of the cakes, it might be notice that the marginal benefit from the second cake selling is 25 units, but the marginal benefit of the tenth cake selling is just two units. This phenomenon can be explained by the fact the first two or three cakes are very appetizing and desirable for one, when she or he is hungry. But with each extra cake, the additional benefits to the consumer diminish.

Simply saying, the marginal benefits go down because the human nature is determined by the desire to have variety of products and services, thus a huge quantity of the same thing bores the consumer, as it gets very old and not desirable for him or her. For example, if refer to another example, provided in the given paper, the example with lake’s water cleaning, it appears that when people are used to swim in a dirty water and, suddenly, that water has been cleaned just for the first time, the health benefits for those people are huge.

But when those people swim in that relatively clean water for a while, and then such water is made even cleaner and it is much better to swim in it, the health benefits for the people are not as dramatic, as they were after the first water cleaning. Such way, we got to the main concept, which is considered to be the base of the economic theory and business.

References

Jones, C. (2005). Applied Welfare Economics. Oxford: Oxford University Press.

McTaggart,D., Findlay C. & Parkin, M. (2003). Microeconomics, 4th edition. Australia: Pearson Education.

Sloman, J. & Norris, K. (2005). Principles of Microeconomics. Australia: Pearson Education.

Swann, M. & McEachern,W. A. (2003). Microeconomics: A Contemporary Introduction, 2nd edition. Australia: Thomson.

Taylor, J. & Frost, L. (2002). Microeconomics, 2nd Australian edition. Milton: John Wiley and Sons.

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