Marginal Analysis as the Basis for Decision Making

Abstract

Margin analysis is a very powerful tool for modelling how individual producers and consumers make decisions. The basic idea is that decision makers make choices based on the comparative costs and benefits associated with small changes in a given state of the world. If the marginal benefits of a small change outweigh the marginal costs of that change, the decision maker makes that small change and then re-analyses for the next potential additional change. Margin analysis is an important component in modelling how producers make decisions to maximize profits and how consumers make decisions to maximize utility. The purpose of this study is to evaluate the different aspects of marginal analysis and how it may be applied in management accounting, therefore it encompasses a lot of aspects from how to evaluate actual opportunity costs to profit maximization and how these aspects can be applied in decision making, consequently this research will try to determine and infer whether the concept can be reliably applied in real life scenarios and be able to produce reliable results which can benefit firms to reduce costs and maximize their profits.