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Week 2 Marginal Analysis

This document discusses marginal analysis and its application in managerial decision making. It defines marginal analysis as comparing the marginal benefits and marginal costs of decisions. The optimal number of workers a firm should employ is where the marginal benefit of an additional worker equals the marginal cost. It provides mathematical formulas to calculate total benefits, total costs, marginal benefit, marginal cost, and marginal net benefit. An example is given to demonstrate calculating these values and finding the quantity that maximizes net benefits.

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24 views

Week 2 Marginal Analysis

This document discusses marginal analysis and its application in managerial decision making. It defines marginal analysis as comparing the marginal benefits and marginal costs of decisions. The optimal number of workers a firm should employ is where the marginal benefit of an additional worker equals the marginal cost. It provides mathematical formulas to calculate total benefits, total costs, marginal benefit, marginal cost, and marginal net benefit. An example is given to demonstrate calculating these values and finding the quantity that maximizes net benefits.

Uploaded by

emerald
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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MANAGERIAL ECONOMICS

Marginal Analysis

VICTORIA NYARKOAH SAM-ABAIDOO (PHD)

UPSA
Marginal analysis

 The theory of marginal analysis states that optimal managerial


decisions involve comparing the marginal (or incremental) benefits of
a decision with the marginal (or incremental) costs.
 Eg, the optimal number of workers to be employed by a firm is
determined by comparing;
 (1) the additional output that will result from employing an additional
worker and (2) the additional costs incurred by the firm as a result of
employing an additional worker.
 So long as the benefits of employing an additional worker exceed the
costs of employing an additional worker, it is profitable to employ.
 However, once an additional worker employed adds more to costs
than it does to benefits, the firm should stop employing.
Marginal Net Benefit
 Let B(Q) denote the total benefits derived from employing Q number of
workers.
 Let C(Q) represent the total costs of employing Q number of workers.
 Then the Net benefit N(Q) is defined as total benefit minus total cost which
is given by the equation
 N(Q) = B(Q) - C(Q)
 Marginal benefit
 This refers to the additional benefits that arise by using an additional unit of
the managerial control variable (In our example, Labour).
 Mathematically it is the change in total benefits arising from a change in the
control variable, Q.
 MB =∆B/∆Q
Marginal Net Benefit Cont.

 Marginal cost
 This on the other hand, is the additional cost incurred by using an additional
unit of the managerial control variable. (In our example, Labour).
 Mathematically it is the change in total costs arising from a change in the
control variable, Q.
 MC =∆C/∆Q
 Marginal net benefits
 These are the change in net benefits that arise from a one-unit change in Q
 MNB(Q) = MB(Q) - MC(Q)
Practical Example

Suppose the total benefit derived from a given decision, Q, is


B(Q) = 150 - 28Q - 5Q2 and the corresponding total costs is
C(Q) = 100 + 8Q
 What is total benefit when Q = 2? Q = 10?
 What is marginal benefit when Q = 2? Q = 10?
 What level of Q maximizes total benefit?
 What is total cost when Q = 2? Q = 10?
 What is marginal cost when Q = 2? Q = 10?
 What level of Q minimizes total cost?
 What level of Q maximizes net benefits?
 At the value of Q that maximizes net benefits, what is the value of
 marginal net benefits?

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