Week 2 -- Marginal Analysis

Welcome to the Week 2 recap!

The first concept we'll go over is Marginal Analysis. This one is tough to explain in a blog, but here goes…

When we’re deciding about work / production optimization, the important decision should be based on the revenue and cost of the last unit provided. The definition in the slide is REALLY GOOD and definitely worth looking at again.

But basically, all we care about is the actual costs that show up in one branch of the tree and not the other. So if a cost shows up in both sides, we can include it... or not!

For applicability's sake, in production, the cost of that last unit of production tends to rise with quantity. Considering the benefits and costs of only that last unit is how we optimize production. In the relatively simple curves we’ll see in this class, if the cost of producing an additional unit exceeds the revenue generated, do not produce it! It’s that easy.

However, if we haven't decided whether to produce, then we must ensure that any production makes some positive economic profit, otherwise it's better off to pursue your next best alternative.

Swing by the CUB tomorrow (1:30), we’ll go over this again if there’s time. Hopefully there will be.