MARGINAL ANALYSIS

Prepared by: Dr. Serena C. Gomez

MARGINAL ANALYSIS
To understand this process, we look first at an example function f(x) = x2 + 3x. What is the rate of change of f at x = 1 ?

We calculate the derivative and then substitute 1 for x: f(x) = 2x + 3 which gives us f(1) = 5

2, 10 1, 4

0, 0
-3 -2 -2, -2 -1 -1, -2 0 1 2 3

X -2 -1 0 1 2

x^2 + 3x -2 -2 0 4 10

This means the function f increased about 5 units from the point where x = 1 to the point where x=2. We use this derivative in marginal analysis.

MARGINAL PROFIT
Marginal profit is the derivative of the profit function We use this marginal profit function to estimate the amount of profit from the next item.

For example: If the profit function is defined by

Find the marginal profit at x = 300. where x is the number of units y = P(x) is in thousand pesos

Therefore,

The marginal profit at x = 300 units is

P'(300) = 80 + 0.2(300) - (40 + 0.4(300)) = -20 P(300) = - P20,000

INTERPRETATION

Using the ideas from the example above, we know that 20 represents an estimate of the change in profit from the points on the profit graph at x = 300 and x = 301. An estimate of the profit from the 301 st item is -P20,000; Meaning that production of the 301 st item will decrease profit by P20,000.

IT IS IMPORTANT TO BE ABLE TO COMPARE THIS TO THE EXACT CHANGE IN PROFIT AS WE MOVE TO THE 301ST ITEM.
Remember that the derivative gives us a point on the tangent line, which is not exactly on` the actual graph of the profit function. The exact profit from the 301st item is given by

P(301) - P(300) = 979.90 - 1000 = - 20.10

We can see that this estimate of - 20 from the derivative of P(x) is very close to the exact value.

SUMMARY:

An estimate of the amount of profit from the 301st item (the change in profit as we go from 300 items to 301 items) is given by P'(300) = -20

The exact change in profit is given by P(301) - P(300) = - 20.10

TRY THIS #1:

A company has a fixed cost of P4, 000 and a variable cost of 0.3X2 + 50X

What is the total cost function? What is the marginal cost when x = 500?

Explain what the marginal cost means.

TRY THIS #2:

DVD players cost P1,550 a piece. What is the revenue function?

The company that manufactures these DVDs has a cost function

C(x) = 0.02x2 + 50x + 4000

What is the profit function?

What is the marginal profit at x = 1000? Explain what this means.

TRY THIS #3:

Use the marginal cost to estimate the cost of producing the 51st item if a companys cost for producing x items per day is given by

C(x) = 0.02x2 + 50x + 4000

Calculate the exact cost of producing the 51st item and compare answers.