Marginal analysis is used by businesses to decide on future strategies and approaches. The basic concept can be explained by considering that there will often be the opportunity to carry out a particular task, but there’s usually a need to understand whether that approach will produce the best results for a business.
As an example, a marginal analysis might be used to consider whether it’s worth investing more time and money in marketing activity. Will such time be well spent, or will it simply mean that the business misses out on other opportunities as a result? The opportunity cost explains the loss of income that’s actually caused by missing out on other options.
In reality, we all take decisions on a daily basis, including within a business context. It can also be said that we tend to carry out a marginal analysis, although that doesn’t necessarily involve a conscious attempt to calculate the effects of a particular action.
Within micro economics, this concept takes on a new level of importance. There’s an understanding that decisions taken at the individual level may seem to be unimportant. When combined with the decisions taken at the same level by many other individuals, however, it can be seen that there is the potential to have a significant impact on an entire business.
Production Possibilities Curve
The Production Possibilities Curve is often included within marginal analysis because it considers the potential output levels associated with goods and services. As resources are shifted towards one element of the economy, there’s clearly the potential to have a positive impact on the output of some goods. At the same time, it would be expected that there might be a negative impact elsewhere. This can also be applied at the level of any single business or enterprise. By moving resources around, there’s the potential to influence income levels and potential profits. Marginal analysis might be used to identify how resources can be used effectively.
Small Business Applications
Marginal analysis is a core concept within economics and can be applied at a number of different levels. Within large business environments, there may well be an acceptance that analysis of this sort should be carried out prior to taking significant decisions. It’s equally true, however, that marginal analysis can be used within a small business environment. By giving careful consideration to how spending is targeted and how resources are used, it’s possible for the small business owner to take informed decisions that are more likely to lead to positive outcomes. By embracing the concept of marginal analysis, it’s clear that most business leaders should regularly be able to take better decisions.