marginal utility

Examples of marginal utility in the following topics:

• Value and Relative Value

  • They find a greater utility in the object.
  • This increase in utility is called marginal utility, and this is all known as the marginal theory of value.
  • And here again it is marginal utility that comes in.
  • Here we also get into the utility for resellers.
  • How much work will it take, and what margins are possible?

• Marginal Analysis

  • Businesses often set prices close to marginal cost during periods of poor sales.
  • In the marginal analysis of pricing decisions, if marginal revenue is greater than marginal cost at some level of output, marginal profit is positive and thus a greater quantity should be produced.
  • Alternatively, if marginal revenue is less than the marginal cost, marginal profit is negative and a lesser quantity should be produced.
  • At the output level at which marginal revenue equals marginal cost, marginal profit is zero and this quantity is the one that maximizes profit.
  • Since total profit increases when marginal profit is positive and total profit decreases when marginal profit is negative, it must reach a maximum where marginal profit is zero.

• Profit

  • An alternative perspective relies on the relationship that, for each unit sold, marginal profit (Mπ) equals marginal revenue (MR) minus marginal cost (MC).
  • Then, if marginal revenue is greater than marginal cost at some level of output, marginal profit is positive and thus a greater quantity should be produced, and if marginal revenue is less than marginal cost, marginal profit is negative and a lesser quantity should be produced.
  • At the output level at which marginal revenue equals marginal cost, marginal profit is zero and this quantity is the one that maximizes profit.
  • Since total profit increases when marginal profit is positive and total profit decreases when marginal profit is negative, it must reach a maximum where marginal profit is zero - or where marginal cost equals marginal revenue - and where lower or higher output levels give lower profit levels.
  • Recall formulas for calculating profit maximizing output quantity and marginal profit

• Distribution Intensity

  • Low price, low margin, and small order sizes often result from this strategy.
  • Retailers such as Lowe's are commonly utilized in selective distribution for large appliances.

• Transfer Pricing

  • From marginal price determination theory, the optimum level of output is that where marginal cost equals marginal revenue.
  • But marginal cost of production can be separated from the firm's total marginal costs.
  • This is referred to as the Net Marginal Revenue in production (NMR) and is calculated as the marginal revenue from the firm minus the marginal costs of distribution.
  • It can be shown algebraically that the intersection of the firm's marginal cost curve and marginal revenue curve (point A) must occur at the same quantity as the intersection of the production division's marginal cost curve with the net marginal revenue from production (point C).
  • From marginal price determination theory, the optimum level of output is where marginal cost equals marginal revenue.

• Markup Pricing

  • Basically, this approach sets prices that cover the cost of production and provide enough profit margin to the firm to earn its target rate of return.
  • Information on demand and costs is not easily available; however, this information is necessary to generate accurate estimates of marginal costs and revenues.

• Specialty Products

  • For example, if the customer utilizes an outlet because it is the most accessible, it would be considered, for that customer at least, a convenience store.
  • Speciality goods have higher profit margins and higher prices relative to convenience or shopping goods.

• Other Pricing Strategies

  • There are many different pricing strategies that can be utilized for different selling scenarios:
  • The goal of such a policy is to realize a large sales volume through a lower price and profit margins.

• Are Global Corporations Beneficial?

  • If successful, these both result in positive effects on the income statement (either larger revenues or stronger margins), but contain the innate risk in developing these new opportunities.
  • For example, Nike had its brand image hugely damaged through utilizing 'sweat shops' and low wage workers in developing countries.

• Customer Expectations

  • Durable goods are those that yield services or utility over time rather than being used up when used once.
  • Conversely, these smaller outlets may offer a wider array of products at low margins, such as a discount store.