Marginal Analysis


Marginal analysis is a cornerstone concept in economics that examines the additional benefits and costs associated with a small change in the level of an economic activity. In simpler terms, it is the process of making decisions based on the "extra" unit. Companies and individuals use marginal analysis as a tool to optimize decision-making and maximize potential gains.

Key Concepts

  • Marginal Benefit (MB): The additional satisfaction or utility gained from consuming or producing one more unit of a good or service.
  • Marginal Cost (MC): The additional cost incurred by producing or consuming one more unit of a good or service.
  • Marginal Net Benefit (MNB): The difference between marginal benefit and marginal cost. Activities are considered worthwhile if the marginal net benefit is positive.

Decision-Making with Marginal Analysis

The goal of marginal analysis is to find the point where the marginal benefit equals the marginal cost (MB = MC). This is considered the optimal level of an activity, as any further increase would result in costs exceeding benefits.

Here's how marginal analysis is applied:

  1. Businesses: Firms use marginal analysis to decide how many units to produce, what price to charge, how many workers to hire, or whether to invest in new projects.
  2. Consumers: Consumers apply marginal analysis by weighing the additional satisfaction from buying one more item against its cost.
  3. Public Policy: Government entities can use marginal analysis to inform decisions about public spending, taxation, and regulation.


A bakery produces cakes. The marginal cost of producing one more cake is $10. If a customer is willing to pay $12 for that additional cake, the bakery has a positive marginal net benefit of $2 and should produce the extra cake. However, if the customer is only willing to pay $8, the marginal net benefit is negative, and it wouldn't be profitable to increase production.


While a powerful tool, marginal analysis has limitations:

  • Assumptions: It relies on the assumption that small changes are possible, and benefits and costs can be easily measured. In reality, decisions may involve larger shifts and difficult-to-quantify factors.
  • Diminishing Marginal Utility: The principle of diminishing marginal utility states that as consumption of a good or service increases, additional satisfaction starts to decline. This can make calculations more complex.


The concept of marginal analysis is rooted in the theory of marginalism, developed in the 19th century by economists like William Stanley Jevons, Carl Menger, and Léon Walras. It revolutionized economic thinking by shifting the focus away from total costs and benefits to incremental changes.