Answer to Question #198501 in Microeconomics for aman

Question

Marginal analysis is one of the most useful concepts in economic decision making. Discuss and show examples including graphs to support your answer.

Answer 1

MARGINAL ANALYSIS: It is one of the most important decision-making tools that businesses use to optimize profitability.

It is defined as the analysis of the costs and benefits of a minor modification in the production of goods or the addition of a single unit of an input or good.

Example:Consider the case of a manufacturing corporation that wants to improve production. Fabric costs $0.50 per pair of pants they make. The pant firm has a monthly fixed fee of $400. If you create 200 trousers per month, those fixed costs are $2.00 each pant. The total cost per pant is therefore $2.50. If, on the other hand, the corporation decides to ramp up production to 400 pants a month. However, if the corporation decides to boost output to 400 pants per month, each pant's fixed cost will drop to $1.00. Assuming that the cost of materials remains constant, the total cost of the pant is $1.50. Doubling production in this way lowers marginal costs.