what is marginal analysis 
marginal analysis is an examination of the additional benefits of an activity compared to the additional costs incurred by that same activity companies use marginal analysis as a decision making tool to help them maximize their potential profits marginal refers to the focus on the cost or benefit of the next unit or individual for example the cost to produce one more widget or the profit earned by adding one more worker understanding marginal analysismarginal analysis is also widely used in microeconomics when analyzing how a complex system is affected by marginal manipulation of its comprising variables in this sense marginal analysis focuses on examining the results of small changes as the effects cascade across the business as a whole marginal analysis is an examination of the associated costs and potential benefits of specific business activities or financial decisions the goal is to determine if the costs associated with the change in activity will result in a benefit that is sufficient enough to offset them instead of focusing on business output as a whole the impact on the cost of producing an individual unit is most often observed as a point of comparison marginal analysis can also help in the decision making process when two potential investments exist but there are only enough available funds for one by analyzing the associated costs and estimated benefits it can be determined if one option will result in higher profits than another from a microeconomic standpoint marginal analysis can also relate to observing the effects of small changes within the standard operating procedure or total outputs for example a business may attempt to increase output by 1 and analyze the positive and negative effects that occur because of the change such as changes in overall product quality or how the change impacts the use of resources if the results of the change are positive the business may choose to raise production by 1 again and reexamine the results these small shifts and the associated changes can help a production facility determine an optimal production rate managers should also understand the concept of opportunity cost suppose a manager knows that there is room in the budget to hire an additional worker marginal analysis tells the manager that an additional factory worker provides net marginal benefit this does not necessarily make the hire the right decision suppose the manager also knows that hiring an additional salesperson yields an even larger net marginal benefit in this case hiring a factory worker is the wrong decision because it is sub optimal because marginal analysis is only interested in the effect of the very next instance it pays little attention to fixed start up costs including those costs in a marginal analysis is incorrect and produces the so called sunk cost fallacy 