Marginal Concepts
In economics and business analysis, marginal values play an important role in making decisions regarding whether or not to increase economic activity. Economic activity is in two general forms i.e. consumption (the activity of individuals) and production (the activity of firms). Therefore, a unit of economic activity by individuals is in terms of units consumed while for firms it is in terms of units of output.
A marginal value is the effect of each additional unit of economic activity. It is a rate of change in total value with each additional unit of activity. In mathematical terms, a marginal value is a derivative (differential) value that is represented on a diagram as the slope or gradient of any type of data.
Marginal Cost (MC)
i) The cost of each additional unit of activity (consumption or output)
ii) Change in total cost with each additional unit of activity.
iii) The difference between the cost of ‘n’ and ‘n-1’ unit.
Marginal Benefit (MB)
i) The benefit derived from each additional unit of activity
ii) The change in total benefit with each additional unit of activity.
iii) The difference between the benefit derived from ‘n’ and ‘n-1’ unit.
A marginal value is therefore different from an average value as follows;
An average or arithmetic mean is simply a total value divided equally among all the units in a ‘basket’ of calculation. It assumes equal distribution of data among all the units. On the other hand, a marginal value is the value of each additional specific unit number. For e.g. suppose the first unit costs $10 to produce while the second unit costs $12. Average cost = $11 but the marginal cost of the 1st unit is actually $10 while the marginal cost of the 2nd unit is $12…none of the two units costs $11.
Every activity incurs a marginal cost (MC) and generates a marginal benefit (MB);
In consumption, cost is in the form of price paid for a product, while benefit is in the form of...