Marginal Analysis

Marginal Analysis

Marginal Analysis, the core of modern economic theory, based on analysis of the utility of successive units of a commodity (or service) or the cost of successive units of a factor of production. Marginal analysis first emerged in a distinct form in 1871 in W. S. Jevons's Theory of Political Economy, Carl Monger's Principles of Economics and Leon Wairas's Elements d'economie politique pace, 1874. Their contribution was mainly in the theory of value where marginal utility explained the consumer's demand for goods. The marginal utility analysis of Jevons and Menger explained for the first time the allocation of expenditure by the consumer, and formulated the 'maximization' solution. By 2011 the concept of the margin had been applied to the theory of distribution and the allocation problem of the producer. Today it is a tool of analysis found in all branches of economic theory.

Since successive units of a commodity have differing degrees of significance, interest attaches to the effects of the loss or addition of the 'marginal' (or 'last') unit. This applies to consumer goods, to factors of production and to the services rendered by them. Marginal analysis thus deals with the logic of choice. It is applied wherever limited resources have to be allocated amongst a variety of ends, and where the object is to maximize satisfaction. The consumer allocates income in order to derive the most satisfaction from the whole of it. The producer allocates expenditure on various factors of production out of limited resources in order to maximize monetary returns, earnings or 'profit'.

The solution to the allocation problem of the consumer is based on the law of diminishing marginal utility: equilibrium in distributing a given income is reached when total utility or satisfaction is maximized; this requires that the marginal utility per unit of expenditure is the same for all goods. Similarly the solution to the allocation problem of the producer is based on the law of variable proportions: equilibrium in the distribution of a given outlay is reached when factors are combined in the proportion which maximizes physical output (or minimizes the cost of producing it); i.e. when marginal physical product per unit of outlay is the sane for every factor. Full productive equilibrium, however, requires the output that will maximize profits. Thus a further condition of equilibrium must be added that the use of all factors will be expanded to the point where the additional (marginal) cost per unit of output is equal to the additional (marginal) revenue per unit obtained from its sale.

Examples Economic Calendar - Bloomberg Economic Calendar

Since then his writings have in turn been increasingly reinterpreted as a special case both by some followers and by some economists who had not wholly accepted his writings. The content of economics is in a state of change, and this site is therefore not a final statement of economic doctrine.

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