Marginal

An incremental or additional change, which may be in the form of cost or benefit. Marginal analysis is a principle that is used to evaluate the efficiency of economic decisions or resource allocation.

In economics, it is generally assumed that consumers will maximize utility from the consumption of a variety of goods when the marginal utility per dollar is the same for the consumption of the last unit of all goods consumed. This is also a precondition for consumer equilibrium when income is exhausted.

In a perfectly competitive market, producers will produce until the marginal cost is the equivalent of the marginal revenue. As such, scarce resources will only be used or allocated as necessary.

Marginal analysis is also used to understand rates of resource substitution—for example, how many tractors must be given up to get more computers or the opportunity cost of using more labor relative to capital.

Mathematically, rates of change denote the marginal concept when other variables are held constant. In other words, the slope of a line indicates the amount by which one variable (dependent variable) is going to change when an independent variable is increased or reduced incrementally (marginally).

The marginal concept also serves the useful social function of evaluating a shadow price. The shadow price has no real existence, but it provides a rationale for explaining whether a policy should be encouraged or discouraged, by assessing its incremental cost or benefit to society. An activity is deemed necessary if the social benefit outweighs the cost, although it is produced insufficiently. A social planner can subsidize its production until the marginal social cost becomes the equivalent of the marginal social benefit.

The marginal concept can therefore be usefully applied to production, consumption, and the evaluation of social policy.