marginal analysis

A major theoretical building block of neoclassical economics, marginal analysis suggests that economic decisions are made at the margin: for example, a consumer might decide to buy one more apple if the price was reduced by 5p, or a business might decide to buy one more van if the cost was reduced by £1,000. The extra cost of an extra unit is known as the marginal cost. Marginal analysis suggests that firms will maximize profit if they produce where marginal cost is equal to marginal revenue, as on all previous units produced they are increasing profit.

Marginal analysis is one of the key features distinguishing the classical economics of Adam Smith and his contemporaries and the more mathematical approach of neoclassical economists, pioneered by Alfred Marshall and others in the late 19th century.