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The theories and principles of economics influence a large variety of business decisions, particularly those related to marginal analysis when used in the application of managerial economics. They have an impact on decisions ranging from those centered on production and inventory to those focused on hiring and cost-cutting measures.
Managerial economics focuses on employing various economic concepts and theories to reach decisions that provide the optimal solution for a wide variety of business challenges and obstacles. When used in conjunction with quantitative measures, such as statistics resulting from numerical analysis and forecasting procedures, economic theories like marginal analysis can provide the best opportunity for firms and businesses to reach maximum profit in an optimal operating environment.
Marginal analysis provides insight into the consequences related to a unit change of an economic input, such as quantity produced. For instance, marginal revenue represents the additional revenue created by an incremental change in units produced, while marginal cost represents the cost associated with producing the additional units of goods. In an optimal environment, managers seek to operate in an environment where marginal cost is equal to the marginal benefit received from additional production or activity. Marginal analysis also indicates the point at which additional units will result in lost revenue or reduced utility for the company.
Management can put the concept of marginal analysis to work in a variety of situations to help optimize outcomes. When analyzing the decision to increase production or purchase additional inventory, marginal analysis can provide an insight into how much additional production or inventory will result in a benefit to the company. Other business decisions that benefit from the application of marginal analysis include those related to hiring additional workers and pricing changes.
The efficient use of marginal analysis in managerial economics requires a basic understanding of the guiding principles of economic theory. This includes understanding the demand for your product and the elasticity of this demand. Elasticity refers to the changes in demand related to certain factors, such as the introduction of a new alternative product or change in pricing of relative goods. These concepts, along with taking into account any limitations and restraints on time and resources, can ultimately impact the outcome of decisions related to marginal analysis.