The main thought is that by investigating the production of only the next item -- i. Simply put, does the benefit from producing the additional product outweigh the cost of production? If the answer is yes, then profit, and your choice, is made. When you have a good decision matrix, why stop there? If making one additional product is good, then making more additional products is better.
You can use marginal analysis to help find the optimal amount of production. With each increase in the number of products and each benefit vs. At this point, the profit earned by making an additional unit will equal zero, meaning that there is no incentive to produce one more unit. Analysis based on one additional unit and optimized until benefit and cost are zero can be applied to multiple business processes. The answer is that you compare, to the best of your ability, the marginal benefits with the marginal costs.
An economically rational decision is one in which the marginal benefits of a choice are greater than the marginal costs of the choice. For some people, the answer will be yes. For others, it will be no. Either way, marginal analysis is an important part of economic rationality and good decision-making.
Practice until you feel comfortable doing the questions and then move on. Glossary marginal analysis: examination of decisions on the margin, meaning comparing costs of a little more or a little less marginal benefit: the difference or change in what you receive from a different choice marginal cost: the difference or change in cost of a different choice Licenses and Attributions CC licensed content, Original Revision and adaptation.
Authored by : Steven Greenlaw and Lumen Learning. Authored by : OpenStax College. Provided by : Rice University. Authored by : Provided by : Pixabay. Skip to main content. Module 2: Choice in a World of Scarcity. Search for:. The average number of QALYs that they obtain per package spent on health care can be calculated. If the person was deciding whether or not to buy extra packages, they would be misled if they looked at the current average QALY per package, which would suggest to them that they will gain 1 QALY for each package.
Instead, they should look at the marginal QALY per package. If they buy one more package, they will gain 0. If, having bought the first package, they buy another one, they will gain another 0. Both of these are well below 1, so if the person was expecting to obtain 1 QALY for each package, they would be disappointed.
This example, like those that are in section 1 , simply shows how marginal values are more informative than average values in some circumstances. But how does this help? First, let us assume that the person likes health, but not above everything else. So, the conclusion is that the person should buy one more package of health care, and this can only be deduced directly by looking at marginal values, not totals or averages. The same principle holds in more realistic cases, and is applied to many economic variables, such as costs, levels of output and levels of spending.
There is even more to marginal analysis. Mathematically, marginal values are the same as rates of change. If the relationship between spending and QALYs was a smooth one, with both measured as continuous variables, and these were plotted together on a graph as a curve, the marginal value at any point on the curve would be the slope of the curve at that point.
Rates of change are very important in mathematical optimisation, so marginal values are important in determining optimal levels of economic variables - for example, maximum benefits or minimum costs. But suppose their willingness to pay for QALYs was also not constant.
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