Marginal analysis is an economic procedure of identifying the extra benefits and cost of producing an extra unit by examining the incremental effect on total revenue and the total cost. It seeks to balance the additional benefit from an action against the additional cost. According to Tombazos (2006), Marginal analysis evaluates the effect of small changes in the control variable thus aids decision making and forms a basis of economic reasoning.
Consumer Products Inc. (CPI) is seeking to expand its business and it would be appropriate to measure the effect on the profits. It will be easy to make the decision on whether to expand or not after having an analysis on the marginal effects. If the marginal benefit exceeds the marginal cost the net benefit will go up and hence it will be appropriate to undertake the expansion. If the expansion will not be profitable hence it should not be undertaken. For CPI the marginal cost is 0.006 which means producing an extra case of toothpaste changes the total cost by 0.006. The profits will be maximized when the marginal cost equals or exceeds the marginal benefit.
For this company to maximize value and profits 7000 cases of toothpaste should be produced. Producing less than 7000 units would lessen the value and cause a loss. If the company raises prices unilaterally the marginal benefit will exceed the marginal cost which would mean more increased profits. However, this may not be economically viable because the company operates in a market with perfect competition. It means that the company cannot influence prices all by itself because there are other stronger brands and increasing the prices could lead to making fewer sales in terms of the number of cases of toothpaste sold.
This will minimize the company's total revenue and profitability. If the market price for a case of toothpaste increased from $42 to $54 the profit maximizing level of output would also need to change. This is because economic efficiency for the company would be attained when marginal benefits equal marginal costs. This represents the point at which all the units for which benefits exceeds the costs are fully used. Having excess benefits is wasting. Therefore, the company would need to increase the cases of toothpaste produced from 7000 to 9000 for economic efficiency. CPI could actually benefit from advertising despite the fact that it operates in a perfect market.
Advertising aims at holding a market share and defending it against other brands. According to Veksler (2007), it ensures product loyalty and this would make CPI products appear more valuable than others in the market. CPI should advertise as it is a way of communicating product information to consumers. It would also make it more expensive for other new companies to enter the market.
If in the long run CPI achieves monopoly over the others, it would mean that its products would be differentiated from competitor's products and are viewed differently though they are substitutes. It would be able to set its own prices without looking at the competitors' prices or the impact in the market. It could use its market power to increase its profits by may be increasing the prices and the production output units. It could also lower its prices to sell more units. It should however still produce the profit maximizing quantity of output that equates marginal cost to marginal benefit.