Man Scie - Marginal Analysis

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Is used to assist people in allocating their scarce resources to maximize the benefit of the output produced. Simply getting the most value for the resource used.

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Marginal Analysis

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The analysis of the benefits and cost of the marginal unit of a good or input.

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Marginal Analysis

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Is a tool that helps determine the optimal inventory level without the use of payoff or decision table. A product of not sold during the day or week is considered loss.

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Marginal Analysis

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A technique widely used in business decision-making and ties together much of economic thought.

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Marginal Analysis

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The Control Variable

To do marginal analysis, we can change a variable, such as the:

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Quantity of a good you buy

Quantity of product you produce, or

Quantity of an input you use

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Key Procedures For Using Marginal Analysis

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1. Identify the Control Variable (CV)

2. Determine what Increase in Total Benefits would be if one More Unit of the Control Variable were added.

3. Determine what Increase in Total Cost would be if one More Unit if the Control Variable were added.

4. If the Unit's Marginal Benefit Exceeds (or equals) its marginal cost, it should be added.

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A manageable number of alternativez or state of nature

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DISCRETE DISTRIBUTION

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Probabilities for each State of Nature are known

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DISCRETE DISTRIBUTION

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A Very Large Number of Alternatives or State of Nature

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NORMAL DISTRIBUTION

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Probability Distribution for the States of Nature can be described with a

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NORMAL DISTRIBUTION

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A Statistical Distribution that shows the probability of Outcomes with Finite Values

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DISCRETE DISTRIBUTION

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Marginal Analysis with Discrete Distribution satisfies the following:

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a. The selling price and marginal loss per unit are known

b. There are many alternatives and states of nature (limited)

c. The alternatives and state of nature are identical

d. probability of occurrence of each state of nature is known and discrete

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Refers to the set of values in the distribution that is considered finite. In other words, the values in the distribution are not continuous.

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Marginal Analysis w/ Discrete Analysis

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The basic premise in a marginal analysis is that it is advisable or favorable for the business to add a unit of product to the inventory if marginal profit is equal to or more than the expected marginal loss. It is the probability of optimal stocking.

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Marginal Analysis w/ Discrete Distribution

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Solution Process of Marginal Analysis w/ Discrete Distribution

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1. Determine the value of probability of optimal stock P (x *)

2. Construct a probability distribution table with an additional column for cumulative probabilities

3. Determine the level of inventory wherein the probability of selling at least one additional unit is greater than probability of optimal stock

P > P (x*)

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Required in Marginal Analysis w/ Discrete Distribution

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1. Determine the marginal profit (MP) per pack

2. Determine the marginal loss (ML) per pack

3. Solve for the value of P(x*) (Probability of optimal stock)

4. Prepare a probability distribution table with an additional column for cumulative probabilities

5. Solve for the Optimal number of packs to order every day

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A statistical rule which states that for a normal distribution, almost all observed data will fall within three standard deviations (denoted by ó) of the mean or average (denoted by m)

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Empirical Rule

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This approach is appropriate when there are very large numbers of possible alternative and states of nature, and the probability distribution of the states of nature is normally distributed

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Marginal Analysis w/ Normal Distribution

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A distribution of values in which they are symmetrical to the mean. The shape of the curve is bell-shaped

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Marginal Analysis w/ Normal Distribution

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Marginal Analysis w/ Normal Distribution Satisfies the following condition:

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a. The marginal profit and marginal loss can be determined

b. The mean and standard deviation for the product are known

c. The probability distribution is normal

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Solution Process of Marginal Analysis w/ Normal Distribution

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1.Find the MP, ML and P (Probability of Optimal Stock)

2. Locate the area of P in the standard normal distribution table

3. Find the optimal stocking level using the relationship if values using the following formula:

Z = x - M / ó