In this article we will discuss about:- 1. Meaning of Margin 2. Importance of the Concept of Margin 3. Special Role.
Meaning of Margin:
In economics, the concept of margin has a great importance. The marginal unit of anything is the unit whose small addition or subtraction is under consideration. In the language of Mayers, “The marginal unit of any factor of production, of any stock of goods and of any output of goods, is one extra unit of the same.”
In economics the term ‘margin’ always refers to anything extra. Thus, the term ‘marginal utility’ of a commodity is the extra utility obtained from the consumption of the extra unit of a commodity, or the term ‘marginal cost’ is the extra cost of producing one extra unit of a commodity.
In economics, we refer to ‘marginal utility’, ‘marginal cost’, ‘marginal revenue’, ‘marginal profit’, ‘marginal product’, etc. It is to be noted that the marginal unit is not necessarily the last unit, although it may sometimes appear to be so. Thus, in any stock of identical goods, any unit, the concept of margin has reference to the addition or subtraction of any one unit without regard to a particular unit.
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In the theory of perfect competition, the marginal firm is the one that would cease producing the product if market price falls. In the theory of the firm, the marginal sellers are those who are just willing to sell their goods at the prevailing price and who would refuse to sell anything at a lower price.
Similarly, in the theory of consumer demand, the marginal purchasers are those who are just willing to buy at the prevailing price and would cease to purchase at a higher price. So, the marginal unit does not refer to the last unit. Rather, it refers to that unit of anything whose addition or subtraction is under consideration.
Importance of the Concept of Margin:
The study of economics shows how important the concept of margin is.
Here are a few illustrations:
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1. Price of a commodity from the demand side depends on the marginal utility.
2. Price of a good from the supply side depends on its marginal cost (of production).
3. The profit of a firm becomes maximum at that unit of output where marginal cost is equal to marginal revenue.
4. Marginal buyers exert considerable influence total demand considerably when the price of a commodity changes.
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5. Substitution of goods, or of factors, takes place at the margin.
6. Elasticity of demand or of supply of a commodity or factor is measured only at the margin.
7. Marginal land does not yield, in the Ricardian system, any rent.
8. The value of the marginal product of a factor determines its earnings.
Special Role of Margin in Micro-Economics:
The marginal concept has, however, a special role in price theory. It is commonly stated that the marginal utility and marginal cost of a commodity jointly determine its value. But, this is not a correct statement. Margins never determine value; rather margins, equally with value, are determined by the interaction of the forces of demand and supply. Where the quantity demanded and quantity supplied of a commodity become equal, both the value and the margin are determined at that point of equality.
Thus, Marshall observes, “Marginal uses and costs do not govern value but are governed together with value by the general relations of demand and supply.” It means that neither marginal utility nor marginal cost of production governs the value of a commodity, which is determined by the general relations of demand and supply.
So, it is the total demand and the total supply that govern both the margin and the value. In fact, margin is a point at which, and not by which, the value of commodity is determined.
This does not, however, imply that the marginal unit has no influence on value. Marginal units, like any other units, constitute a part of the total supply and hence exerts some influence on value. Because of this, we must “go to margin to study the action of those forces which govern the value of the whole.” (Marshall).