Supply and demand is the examination of market forces that determine the potential profitability of an item. However, the extent to which these factors work together is somewhat of an exact science, with a variety of things entering into the question. Marginal analysis requires an economist to make decisions ‘at the margin,’ determining just how the next dollar or hour should be spent. A marginal analysis of supply and demand, then, would help to determine supply and demand curves in a way that figures out how much they cost.
The market demand curve showcases how many goods would be purchased at a specific price, assuming all other factors are constant. The Law of Demand determines that there is an inverse relationship between the cost of an item and how much is demanded of it; the total demand showcases the individual demands summed up (McGuigan and Moyer, 2007).
Marginal utility determines that the usefulness of a good diminishes greatly as the number that is consumed goes up. Therefore, the demand price for an item would decrease while the number of items consumed increases as well. As the marginal utility of a good increases or decreases, the price of the good would also change as these things become more in demand. In the event that one can somehow create more products without an increasing marginal cost, one can maximize the potential of their supply and the profits gleaned from their purchase – this is one of the primary benefits of marginal analysis (Png and Lehman, 2002).
In order to determine the demand curve in a marginal way, consumer equilibrium must be determined. For example, in the marginal analysis of the sale of computer hard drives, the utility to price ratio could be 3 utils per dollar. With this information, the marginal utility of hard drives divided by the utility to price ration would equal the price of hard drives. This creates a demand curve that can change depending on the marginal utility of the hard drive; this utility diminishes along with demand (McGuigan and Moyer, 2007).
Performing a marginal analysis of supply and demand determines a number of things. First, it allows each individual purchase or item demanded to make a noticeable, quantifiable change in the equation. There are two different schools of thought in applying marginalism to supply curves: neoclassical economists use them to represent marginal pecuniary costs determined by the items possessed; therefore, as the slope curves upward, diminishing returns are experience. However, thorough-going marginalism determines that the supply curve is complementary – the thing being demanded is money itself, and goods and services are the things being used to purchase it. Money being substituted for goods and services is then what decides the shape of the curve (Hirschey and Pappas, 2009).
In conclusion, the managerial approach to supply and demand allows for a more incremental way to measure the specific gains and losses experienced when supply or demand increases or decreases. It allows for a more quantifiable method of examining the supply and demand curves, and permits economists to determine just how much they need to supply before profitability becomes an issue. In this way, it is a very effective method of deciding exactly how to operate production and marketing, given these conditions.
Hirschey, M., & Pappas, J. L. (2009). Managerial economics (7th ed.). Fort Worth: Dryden Press.
McGuigan, J. R., & Moyer, R. C. (2007). Managerial economics (3rd ed.). St. Paul: West Pub. Co..
Png, I. (2002). Managerial economics (2nd ed.). Malden, MA: Blackwell Publishers.