WHAT IS MARGINAL ANALYSIS?
Marginal Analysis is the comparisons of marginal benefits and marginal costs to find the effects on total revenue and total cost. Marginal Analysis helps consumers decide what to buy based on additional changes to resources. It used for maximizing the benefit for people allocating their resources. People want to obtain the highest Net Benefit (Total Benefit- Total Cost). When the benefit is greater than the cost, the consumer will most likely buy the product and the net benefits go up.
The main goal is to obtain allocative efficiency. Allocative efficiency is when Marginal Cost= Marginal Benefit. This is when your economy is the most efficient.



external image fwk-rittenberg-fig06_003.jpg
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For this specific graph, the point of allocative efficiency is where the marginal benefit line (blue line) and marginal cost line (red line) of the hours studying for the economic test are equal. This would mean that the allocative efficiency for this graph is studying for 3 hours and receiving 8 points more than if you didn't study at all.

BASIC CONCEPTS:
Marginal Cost- change in cost over the change in quantity. The increase or decrease of production costs with each additional item produced.
Marginal Benefit- the increase in activity's overall benefit that is caused by a unit increase in the level of that activity, when everything else is constant.
Control Variable- This is the variable on the graph that can be changed. It is used to show the relationship between the two variables.
Ex. quantity of a good you buy, the quantity of output you produce, or quantity of an input you use.
Utility- the benefit or satisfaction that a person gets from the consumption of a good or service. Your Happiness :) .
Productive efficiency- the situation in which a good or service is produced at the lowest possible cost.
Allocative efficiency- state of the economy in which production is in accordance with consumer preferences; every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it.
Positive analysis- Analysis concerned with "what is'. It focuses on facts and cause and effect relationships. It is science-based.
Normative analysis- analysis concerned with "what ought to be". Incorporates value judgment about what the economy should be like. Looks at desirability.

Production Possibility Frontier
-graph showing the various combinations of output that can be produced when all resources are being utilized in the most efficient manner possible, given the current level of technology.

Production Possibility Frontier (PPF)
Production Possibility Frontier (PPF)

In this frontier, the points on the line represent the situation when the consumer is using the resources most efficiently. Any point under the graphed line shows the situation where the resources is not being used to its full potential, or not all the resources are being used. The points outside the graph show that the resource is unattainable in this specific market, or what the future holds.
With the graph above, A, B and C represent the points where production is most efficient. Point X is where production is not being used efficiently by both resources; point Y demonstrates an output that is not attainable.

Example:
Marginal Analysis of Stairs v. Escalator

Steven E. Landsburg goes through a dilemma on what the actual marginal analysis between stairs and escalators where. Clearly if you stand on still stairs, you’ll never get anywhere. He writes, “Taking a step has a certain cost, in terms of energy expended. That cost is the same whether you’re on the stairs or on the escalator. And taking a step has a certain benefit- it gets you one foot closer to where you’re going. That benefit is the same whether you’re on the stairs or on the escalator.” So the question is, what makes either of the choices beneficial? Landsburg later explains, “If the costs are the same in each place and the benefits are the same in each place, then the decision to step or not to step should be the same in each place.” He gives us the definition of marginal analysis to help us make our decisions. “Marginal Analysis is the weighing of cost and benefits with taking a single step.” He evens gives us suggestions and examples to help us make our decision. He states, “We use marginal analysis to explain how people choose everything from the lengths of their workdays to the number of chocolate-chip cookies they have for lunch.” He also explains that “benefits should be measured in time, not distance.” With these suggestions, we are left with the decision: do we choose to walk on the escalator even though we walk even faster on the stairs, or do we use less energy and stay on the escalator. Clearly every person’s marginal analysis is different. Landsburg ends his discussion with a very important quote. He says, “Marginal analysis really works. If it seems not to be working, the right question is not, ‘Why doesn’t the marginal analysis work?’ Instead, the right question is, ‘How am I failing to understand the marginal analysis?’ or, more succinctly, ‘In what way am I being stupid?’” With this said, the moral of the story is there will always be marginal analysis with each situation.



Refrences
http://www.slideshare.net/mrtopf11/ppf-powerpoint
Businessdictionary.com
http://www.cals.ncsu.edu/course/are012/lectureppt/lectur10.ppt%20%20.wikispaces.com/AP%20Microeconomics