Meaning and definition of Marginal Analysis Marginal analysis refers to an evaluation of the additional benefits of an activity contrasted to the

additional costs of that activity. Marginal analysis is used by companies as a decision making tool to provide help in increasing the profits. Moreover, marginal analysis is used instinctively to make a host of everyday decisions. Also, marginal analysis is generally used in microeconomics while analyzing the complexity of a system being affected by marginal manipulation of its comprising variables. Significance of Marginal Analysis Marginal analysis is significant for being one of the 10 principles of economics, as delineated by Harvard economist Gregory Mankiw in his Principles of Economics. As per these principles, margin analysis is one principle that governs the decision making rationale of the individuals. For example, a person might weigh such decisions as whether to take a vacation, work additional hours, or even have an extra glass of wine with dinner. Besides, many economists contend that rational decision makers take an action only if the additional satisfaction or benefit, known as the marginal benefit, exceeds the additional, or marginal cost of doing so. Features of Marginal Analysis Differential calculus proffers mathematical tools which are helpful to the economists and business experts in performing marginal analysis. Differential functions in calculus look at an outcome or dependent variable, (referred as y) as a function of one or more independent variables (referred as x). The equation evaluates the change in the value of y for every increase in the value of x. in economic terms, y signifies benefits and x signifies costs. Therefore, calculus

is helpful to the economists in quantifying the change in benefits resulting from an increase in a unit of costs. Benefits of Marginal Analysis Marginal analysis is helpful to individuals and businesses in balancing the costs and benefits of additional actions, like whether to produce more, consume more, and similar other decisions, thus determining whether the benefits will exceed costs and increase utility. Moreover, marginal analysis is also beneficial to the government policy makers. Weighing the costs and benefits can help government officials in determining whether allocating additional resources to a specific public program will generate extra benefits for the general public

Accounting Profits
o o

Total revenue (sales) minus dollar cost of producing goods or services Reported on the firms income statement

Economic Profits
o

Total revenue minus total opportunity cost

The accounting profit is the difference between total revenue and total cost excluding the economic cost (opportunity cost) of owner-supplied resources such as time and capital. At the other hand, In the economic cost, we include the opportunity cost in our calculations. When total revenue exceeds both explicit and implicit costs, the firm earns economic profit. Economic profit is smaller than accounting profit Another answer culed be: Economic Profit is slightly different than accounting profit, which merely the firm's total revenues minus its total costs. Economic profit is defined as total revenues minus total operating costs minus opportunity cost. Opportunity cost is defined as the cost of the profits you forgo by not doing another activity. For example the opportunity costs of opening a lemonade stand is equal to the difference between the accounting profits of the lemonade stand minus the accounting profits of a more profitable hot dog stand.

Economic Profit vs. Accounting Profit While economic profit includes theoretical estimations of loss based on opportunity cost and value, accounting profit is the actual revenue calculations generated by bookkeepers. In other words, bookkeepers see accounting profit in dollars that have actually been spent and earned. As a result, a firm might generate a noticeable accounting profit, but if it experiences a hefty loss in opportunity cost, its economic profit could be negligible.

The Basic Differences There are several differences that help define economic profit vs. accounting profit. First of all, while economic profit includes the opportunity cost, accounting profit does not take that into consideration. In other words, economic profits include both implicit costs (potential value of goods and services) and explicit costs (money directly paid), while accounting profits consider explicit costs and depreciation provisions. Accounting profits are computed for a particular time period (usually for a quarterly or annual report), and will almost always exceed the relative economic profit.