Marginal Analysis Formula And Calculation

In business and our everyday life, we need to make sound, logical, and maximum benefit to our lives. Marginal analysis is a decision-making tool that can help businesses maximize their potential profits. It doesn’t only apply to businesses but to our everyday lives as well.

What Is Marginal Analysis?

Marginal analysis is a cross-examination of the additional benefits of activity and the additional costs incurred by that activity. The marginal analysis aims to determine if the costs associated with the changes in a business activity or a financial decision will be of benefits that can make up for the costs. 

This will help in decision-making for businesses, especially when choosing one option over the other. Or if there are limited resources for more than one project. With marginal analysis, the best option can be decided upon.

The formula for marginal analysis is:

Marginal Cost = (Change in Costs) / (Change in Quantity).

What is Change in Cost?

When the need arises to produce more or less output volume, a change in cost will occur. In business, there are times when the costs of production may increase or decrease. When this happens, in some cases, manufacturing more units of products will require the need to hire one or two workers. This, in turn, will increase the purchase cost of raw materials, causing the overall change in production cost. To determine the change in costs, subtract the production costs spent during the first output from the next batch’s production costs when output has increased.

What is Change in Quantity?

With varying levels of production, the volume of output will either increase or decrease. The quantities added are crucial to evaluate the changes in cost. An increase in the volume of goods produced will convert to costs of goods manufactured (COGM). The number of goods made in the first production batch will be subtracted from the volume of output made in the following production batch to evaluate the change in quantity.

Example Of Marginal Analysis

We can see examples of marginal analysis in every aspect of life, but in this case, we would take a look at a company that makes bags. If they decide to make more bags of an existing collection or add a new collection, a marginal analysis of the new added will have to be carried out. Whatever their choice is, there are costs to consider such as costs of:

  • Extra machinery 
  • Extra workforce 
  • Additional storage space or production facility 
  • Raw materials 

Once determined, these additional costs would be then estimated, compared to the amount of money expected to be made in sales. If the income generated from sales outweighs the production cost, it would be wise for the company to go ahead with the production, and if otherwise, it would be best they suspend the production.


There isn’t a direct formula for marginal analysis. Instead, there are two components or margin analysis that is involved in the calculations. These calculations would yield the estimates that would be compared. These components include:

Marginal cost

Marginal cost is the cost of production of the last unit of a product. It is the difference in total cost between the first unit and the next. That is, it is the increase in total cost from the last unit.

  • Marginal utility

Marginal utility is the benefit or satisfaction a consumer gains from consuming the last unit of a product.

Let’s take a look at another example using the bag-making company. If the company produces five bags at the total cost of $100 and a sixth bag’s production makes the overall cost increase to $120, then the sixth bag’s marginal cost is just $20. 

If they produce 20 bags at the total cost of $500 and the cost of producing the 21st bag increases the total cost to $550, the marginal cost becomes $50. An increase in production volume decreases the marginal cost. 

So, it would be wiser for the company to make 21 bags than make just six bags. If each bag is sold at $40, for six bags, it would be $240, and for 21 bags, it would be $840. Thus, the profit margin is even more comprehensive.

This will, in turn, increase the marginal utility as more consumers equal a greater utility. These are the components of marginal analysis and how it can be calculated.

Application In Everyday Life

As stated earlier, marginal analysis is not only limited to business or economics but can also be applied in our everyday life. It is a decision-making tool that we can use in making decisions like; how to spend our time and other choices we make in all aspects of our lives. 

In buying groceries and shopping, marginal analysis can prove to be useful. Rather than buy things that we won’t get a lot of satisfaction from, we can carefully consider our choices and make the best ones by comparing the costs to the utility we would derive from it. 

Marginal analysis in our everyday life teaches us that choices have their costs and benefits, and in making a choice, its benefits should outweigh its costs. 

Marginal analysis is an essential tool for making decisions in our day-to-day activities. Most economists agree that rational decisions will only take action if the additional benefit or marginal utility is greater than the cost. That is to say, we want a more significant value at a lesser cost, and with marginal analysis, we can make choices that give us just that.


Marginal analysis is limited because it is hard to estimate certain things like every consumer’s marginal utility accurately. It is mostly unknown and can only be specified by the consumer. It is also based on the assumption of an ‘almost perfect’ market that doesn’t exist. 

The marginal analysis doesn’t consider unforeseen situations that may change decisions made based on it into bad ones in the future. This means that marginal analysis should be applied thoughtfully for more reliable and accurate data.


Marginal analysis is essential in all ramification of our lives. It is one of the ten principles of economics distinguished by the Harvard Economist; Gregory Mankiw in his ‘Principle of Economics.’ 

Marginal analysis is a principle that guides the decision-making capacity of business owners and individuals. Some of the benefits of marginal analysis are:

  • Helps businesses, investors and individuals to balance the cost and benefit of their actions.
  • Assists in policymaking in aspects of governance and leadership.
  • Helps in increasing the effectiveness and accuracy of decision-making, thereby maximizing utility (benefit)

Marginal analysis is an essential tool for making decisions and is widely applied by business owners and investors. Even with its limitations, it helps to guide individuals on how to make decisions.

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