ECON545 Week-2 Discussion 1

 
Marginal analysis allows companies to measure the additional benefits of one production activity versus its costs using cost-versus-benefits comparison. Using this comparison allows a firm to see how much it can produce and yield max profits (break-even point). Some variables in marginal analysis are

The quantity of the product purchased

The quantity of a goods produced

Shipping

Example..  Activision sells Call of Duty Advanced Warfare for PS4 and Xbox 1 for $59.99 and it cost $25 a piece to produce if Activision produces 4 million of this title. This will result in a total cost of $100 million and a total revenue of $240 million. Once the 4million +1 unit of Advanced Warfare is created, Activision total revenue then goes to $240million plus $60 because the production cost are met. If their total cost goes to $200 million because of additional celebrity actors and better 3D graphic software - upper management's decision to produce the 4million +1 unit would be a bad one because the cost of creating the video game  rose from $25 to $50 per unit. Activision's net benefit goes up by $60, while the overall cost increased by $100 million, it doesn't take a rocket scientist to see that the benefits of producing additional units are not worth the cost. Either Call of Duty produces 1.5 million more and pay more in wages/salaries to see the same marginal revenue increase (so not worth it for a title that will last a year and depreciate) or it sells higher (which the consumer probably will not buy a $120 for a video game) or production must be cut. This is usually the case with marketing trying to offset shipping and reap additional funds through in game purchases and limited box sets.

http://www.adweek.com/news/advertising-branding/inside-massive-campaign-behind-call-duty-advanced-warfare-160993

 
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