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Econ: What is Marginal Analysis? 7 Views
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Description:
What is Marginal Analysis? Marginal analysis is the comparison and weighing of supplementary benefits to supplementary costs when evaluating a new product, service or process being proposed to be added to a business.
Transcript
- 00:00
And finance Allah shmoop what is marginal analysis All right
- 00:07
people You know that moment the one when you think
- 00:10
just one more One more cookie One more cup of
- 00:14
coffee One more bite and then just one more And
- 00:17
you know one more until you realize that one more
Full Transcript
- 00:20
one more time maybe is not such a good idea
- 00:22
when you're having that just one more moment Economists call
- 00:26
this thinking on the margin The margin is just when
- 00:30
you add one more For instance your marginal benefit of
- 00:34
just one more cookie after you've already had one is
- 00:36
probably still maybe net positive But after you've had ten
- 00:40
cookies and your stomachs of rumbling saying What are you
- 00:43
doing to me Why to which you say I'm a
- 00:45
slave to my taste buds What's it to you Stomach
- 00:49
When the cost of just one Mohr outweighs the benefits
- 00:52
it's usually time to call it quits Well marginal analysis
- 00:55
is when we look at things from this perspective by
- 00:57
asking what would happen to the output if we added
- 01:00
just one Mohr input Well our cookie examples an example
- 01:03
of the law of diminishing marginal returns which is just
- 01:07
one way we can use marginal analysis diminishing marginal returns
- 01:11
It's when we get less and less benefit from the
- 01:14
same input So we get less and less enjoyment from
- 01:17
each cookie with each additional one that we eat until
- 01:19
eventually It's enjoyable anymore Like your digestive system can only
- 01:23
handle so much Marginal analysis has used everywhere when we
- 01:26
look at consumers consuming when businesses air trying to minimise
- 01:29
costs and when governments air tinkering around with the financial
- 01:32
models on howto incentivize us Teo do things any time
- 01:36
you see the word marginal Like in marginal cost of
- 01:39
production and marginal propensity to consume it refers to thinking
- 01:44
on the margin when the input changes a tiny bit
- 01:47
Well how does that affect the output in it What
- 01:49
rate for instance marginal propensity to consume asks when consumers
- 01:54
have more disposable income in their pockets How much more
- 01:57
money are they in fact spending well as opposed to
- 02:00
investing it or hoarding it under your mattress Because you
- 02:03
forgot inflation was a thing Oops What marginal analysis is
- 02:06
important for firms as well as cookie eaters Firms want
- 02:09
to make just one more just one more Just one
- 02:12
more of whatever they're selling like say a waffle irons
- 02:15
that make keyboard shaped waffles until they stopped making money
- 02:19
selling them the keyboard shaped waffle iron Producers find that
- 02:22
sweet spot where marginal costs equal marginal revenue which is
- 02:26
where the cost of just one more waffle iron equals
- 02:30
the revenue they make by selling that one more waffle
- 02:33
iron right If they go below it like they can't
- 02:35
sell it well then there actually losing money producing more
- 02:38
waffle irons Well just like when you ate cookies you
- 02:41
basically ate them until your marginal cost equalled your marginal
- 02:44
benefit As long as the marginal benefit is higher than
- 02:46
the marginal cost it's hard to say no to the
- 02:48
cookies whispering your name from the sugar stores in the
- 02:51
kitchen But when all of a sudden you realize eating
- 02:54
one more cookie is going to do more harm than
- 02:56
good when your marginal costs of just one more cookie
- 02:59
is higher than your marginal benefit of just one more
- 03:02
cookie well then you call it quits Unless you're a
- 03:04
mascots they want then your marginal cost Might it also
- 03:06
be benefits But we'll save that complication for Advanced Micro
- 03:09
economics The government uses marginal analysis on a mega scale
- 03:13
in the aggregate as economists say like when the Fed
- 03:16
is in the Federal Reserve lowers interest rates Jost a
- 03:19
smidge of a percentage making borrowing money cheaper to try
- 03:23
to get people to borrow just a smidge more Right
- 03:26
Okay well marginal analysis is all about tinkering at a
- 03:29
little more Take away a little less to see what
- 03:31
happens next time Your tinkering well maybe with deciding how
- 03:35
many keyboard shaped waffles you should make with your new
- 03:38
keyboard Waffle Iron Well just remember now you're thinking like 00:03:41.543 --> [endTime] an economist tasty
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