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
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.
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