Marginal Analysis: 

Marginal analysis is generally used to help firms in allocating their scarce resources to maximize the benefit of the output produced. Marginal analysis is the analysis of the benefits and costs of the marginal or additional unit of a good or input. Marginal Analysis is a technique that is widely used in business decision-making and combines together much of economic thought. In any situation, firms and individuals want to maximize net benefits. Net benefits are nothing but the total benefits minus the total costs.

In simple terms it can be stated that marginal analysis balances the additional benefits from an action against the additional cost. In any case, whether it is a firm deciding whether or not to expand production, a consumer deciding if another ice cream is a good idea, or a professor choosing to give an extra exam, optimal performance requires that benefits and costs be equilibrated on the margin. What this means is that if the additional benefit exceeds the additional cost, it is necessary to take action. Keep taking it as long as the benefit exceeds the cost, and to ensure that all excess benefits (those that exceed costs) are accrued, do it until for the last action, the benefits just equal the costs.

The benefits from the last action (such as unit of production or consumption) are termed marginal benefits, and the costs from that action are termed marginal costs. Economic assumptions, verified by much experience, show that for most actions the benefits per unit are falling, while the costs are increasing. Thus, one measure of economic efficiency is that marginal benefits equal marginal costs. At that point, all the units for which benefits exceed costs are used. Too little, and some excess benefits are wasted; any more, and the costs for later units exceed the benefits.