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MANAGERIAL ECONOMICS
BEEG5013
PREPARED FOR:
LT COL PROF DR ABDUL RAZAK CHIK
PREPARED BY:
NUR ASIAH MOHD SHARI
813934
NUR HADILA ISMAIL
813935
QUESTION 6
The ultimate aim for manager/decisionmaker is ‘optimal level of production’. How do
Marginal Utility, Marginal Product, Marginal
Revenue & Marginal Cost assist their
decisions?
INTRODUCTION
Profit maximization is the short run or long run process whereby
the price and output level that returns the greatest profit is
determined by a firm.
Optimum level of production can be achieved when the
production is at the maximum, most efficient and beyond which
production is.
Marginal is defined as a small change in total revenue, consumer
satisfaction or in total cost
Marginal utility as the gain from an increase or loss from a
decrease in the consumption of a good or service.
Marginal product can be define as the change in total product
per unit change in labour used.
Marginal revenue is the revenue a company gains in producing
one additional unit of a good.
Marginal cost be defined as change in the total cost when the
quantity produced has an increment by unit. According to Arthur
Sullivan and Steven M. Sheffrin, it is the cost of producing one
more unit of a good.
DECISION MAKING
MARGINAL
UTILITY
MARGINAL
COST
DECISION
MAKING
MARGINAL
REVENUE
MARGINAL
PRODUCT
MARGINAL UTILITY
 The theory of marginal utility
was introduced by William
Stanley Jevons (1835-1882)
 MU –gain from an increase or
loss from a decrease of a
consumption of a good or
service
 Amount of happiness brought
by the next unit of a good
 Can be used to analyze
consumer behaviour
• According to T.R.Jain & O.P.Khanna (Business Economics –for
BIM), MU can be positive, negative or zero
• Positive MU means consumption of an additional item
increases the total utility
• Negative MU – when the consumption of an additional item
decreases the total utility
• Zero MU – consumption of extra units of items have no
change on the total utility
• MU is positive, negative or zero – total utility is always positive
• This table shows that, the amount of satisfaction decrease
with each addition of apples.
• Shows the utility of each bundle, the total utility and the
marginal utility of adding the apple into the bundle.
• Marginal utility (MU) is the amount of utility we gain by
adding one more unit (increasing Quantity by 1).
• In short, marginal utility is the increment to total utility.
• Through this table, if we increase Q from 3 to 4, TU increases
by 5, so the marginal utility equals 5 when Q is 3.
MARGINAL PRODUCT
• Marginal product is described as the additional output that is
produced by one more unit of an input.
• It reflects how the last unit effect the total product. This
concept is important to analyse short-run production.
• Marginal product can be calculated by dividing the change in
the total product by the change in the variable input.
• In the calculation of marginal product, we must hold all
factors, with the exception of the increase in units of labour,
constant. This means that only the units of labour change and
other factors such as property, plants and equipment available
for production remains the same.
• The formula is simplified as follows.
• Average Product = Quantity / Labor
• Marginal Product = Quantity / Labor = dQuantity / dLabor
• Let’s refer to the simple example.
• First, we need to calculate the change in total product. Assume that
by adding 2 additional worker will increase the population by 25
units. Thus, the total change in the product is 25 units.
• Next is to calculate the variable input. Continuing with the same
example, we added two workers, so the change in variable input is 2.
• Step 3, is to calculate the change in total product by the change in
the variable product. Continuing with the same example, 25/2 =
12.5. This figure represents the marginal product
• Example taken from McGuigan 10th Edition text book
Table: Labour, Marginal Product and Average Product example
• When marginal greater average, it shows that marginal
product is rising and lies above average product. This is
consistent with an increasing average product. If we hire
an additional worker in this early stage of production, then
the marginal product of this worker is greater than that of
the existing workers. This, as such, increases the average
for all workers.
• When marginal equals to average, this is the point of
intersection and also the peak of the average product
curve.
• Once the marginal product curve moves below the average
product curve, then the average product curve declines.
• When we hire additional worker in the middle of this
range, the marginal product of this worker is less than that
of the existing workers, which pulls down the overall
average.
The law of diminishing marginal
productivity shows us that instead of
continuing to increase the same input, it
might be better to stop at a certain level,
increase a different input, or produce an
additional or different product or service
to maximize profit.
MARGINAL COST
Marginal cost is defined as the change in the total cost, that
arises when the quantity produced has an increment by unit.
At each level of production and time period being considered,
marginal costs include all costs that vary with the level of
production, whereas other costs that do not vary with
production are considered fixed.
Marginal costs are variable costs consisting of labour and
material costs, plus an estimated portion of fixed costs (such
as administration overheads and selling expenses).
In companies where average costs are fairly constant, marginal
cost is usually equal to average cost.
The concept of marginal cost is critically important in resource
allocation because, for optimum results, management must
concentrate its resources where the excess of marginal
revenue over the marginal cost is maximum.
Also called choice cost, differential cost, or incremental cost.
MC = Change in Total Cost
Change in Quantity
While other cost-related terms are noteworthy, marginal cost is the
most important.
The reason is that the increase marginal cost reflects the law of
diminishing marginal returns
MR ↓ MC ↑
MC ↑ P ↑
The result is a +ve relation between P and Q supplied – law of supply
and supply curve.
Marginal cost tends to be relatively high but declining for small
quantities of production. It then reaches a minimum and rises for
larger quantities of output. When plotted in a graph, marginal cost
traces out a U-shaped pattern. The reason for this shape is directly
related to increase and decreasing marginal returns and especially
the law of diminishing marginal returns
• Marginal cost tends to be relatively high but declining for
small quantities of production.
• It reaches a minimum and rises for larger quantities of output.
When plotted in a graph, marginal cost traces out a U-shaped
pattern.
• The reason for this shape is directly related to increase and
decreasing marginal returns and especially the law of
diminishing marginal returns.
MARGINAL REVENUE
• Marginal revenue helps to analyse the total potential benegits
and consequences associated with increased in production.
• Additional revenue or benefit gained from producing
additional unit of product is measured by MR.
• Marginal revenue can be defined as the increase in revenue
from selling one more unit of a product. The concept is
important in microeconomics because a firm's optimal output
(most profitable) is where its marginal revenue equals its
marginal cost.
• Marginal revenue indicates how much extra revenue a firm
receives for selling an extra unit of output.
• Marginal revenue is the extra revenue generated when a firm
sells one more unit of output.
• The marginal revenue curve is a horizontal, or perfectly elastic,
line for a perfectly competitive market.
• For a monopoly, oligopoly, or monopolistically competitive
firm, the marginal revenue curve is negatively sloped.
Marginal revenue curve
CONCLUSION
Marginal analysis is very relevant tool for business owners
• A combination of marginal cost and marginal revenue allow business owner to find the optimal level
of output and price that will lead to maximum profit
Tracking MR allows a business to make changes when demand warrants
• If the price drops to low, company might want to consider raising prices because there is little to be
gained from selling at a low MR, as the extra business does not bring in that much money
Marginal analysis is helpful to individuals and businesses…
• In balancing the costs and benefits of additional actions (whether to produce more, consume more
etc) determining whether the benefits will exceed cost and increase utility
Marginal analysis also beneficial to government and 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