1.
Application of Marginal Analysis in Deciding to Offer Plant-Based Milk
Alternatives
Marginal analysis refers to evaluating the additional benefits and costs
associated with deciding. In the context of introducing plant-based milk
alternatives such as almond milk and oat milk to the coffee shop’s menu,
marginal analysis would help determine whether the incremental revenue
generated from these options would exceed the additional costs incurred.
To apply marginal analysis in this scenario, I would begin by estimating the
demand for plant-based milk among current and potential customers. This
involves gathering data on how many customers regularly request such
alternatives, surveying customer preferences, and analyzing industry trends.
Next, I would consider the additional cost of purchasing plant-based milk,
including any necessary changes to inventory or equipment to accommodate
the new products. For example, if purchasing oat and almond milk costs 20%
more than dairy milk, I would need to assess whether the higher prices for
these drinks could cover those increased costs without deterring customers.
Marginal analysis would involve assessing the marginal revenue (the extra
income from offering plant-based milk) against the marginal cost (the extra
expenses incurred). If the marginal revenue from selling plant-based milk
options outweighs the marginal cost, it would make financial sense to
introduce these options. If the costs exceed the potential revenue or
customer demand, then offering the alternatives might not be feasible or
profitable. The analysis would need to account for both direct costs and
potential indirect benefits, such as increased customer satisfaction and
market differentiation.
2. The Concept of Diminishing Marginal Utility and Its Relevance
Diminishing marginal utility refers to the principle that as a person consumes
more of a good or service, the additional satisfaction they derive from each
subsequent unit decreases. This concept is critical when evaluating the
feasibility of introducing plant-based milk options, as it would help determine
whether offering multiple varieties of plant-based milk (such as almond, oat,
soy, and coconut) would provide diminishing returns in terms of customer
satisfaction and profitability.
In this scenario, the first introduction of a popular alternative, like oat milk,
might lead to a significant increase in customer satisfaction and sales
because it fills an unmet demand. However, as more alternatives are added
(such as almond or soy milk), the added value to customers might decrease.
If the majority of customers prefer oat milk, offering almond and soy milk
may only attract a small segment of the market. The additional cost of
stocking these options may not be justified by the smaller increase in
satisfaction and sales.
Diminishing marginal utility could also influence pricing decisions. If
customers derive less satisfaction from additional variety, they may be
unwilling to pay a premium for a wider selection. Therefore, understanding
this concept helps in evaluating the trade-offs involved in offering multiple
plant-based milk options and determining the optimal number of choices that
maximizes both customer satisfaction and profitability without incurring
unnecessary costs.
3. Personal Reflection on Using Marginal Analysis
A real-life situation where I applied marginal analysis occurred in my
business, B.V. Diamonds, when I had to decide whether to invest in
additional marketing channels. Initially, the business relied heavily on social
media advertising through platforms like Facebook and Instagram. However,
I considered adding Google Ads to expand our reach. Using marginal
analysis, I evaluated the potential increase in revenue from Google Ads
versus the additional cost of running those campaigns.
I started by analyzing the customer acquisition cost for each platform and
compared the effectiveness of existing social media ads. I estimated that the
introduction of Google Ads would bring in new customers, but the marginal
cost per customer acquisition would be higher than on Facebook.
Additionally, I examined whether the expected revenue from customers
acquired through Google Ads would justify the expense. Ultimately, the
marginal revenue from new customers did not exceed the marginal costs,
and I decided against expanding into Google Ads at that time. Instead, I
focused on optimizing our existing channels, which had lower costs and more
proven results.
This decision demonstrated how marginal analysis can be a valuable tool for
ensuring that investments yield sufficient returns. By assessing both the
incremental benefits and costs, I avoided making a costly decision that
would not have significantly improved the business’s bottom line.
Conclusion
Incorporating economic concepts like marginal analysis and diminishing
marginal utility is crucial for making informed business decisions, such as
whether to offer plant-based milk alternatives. By analyzing the additional
benefits and costs associated with this decision, a coffee shop owner can
better understand the feasibility of introducing such options. Additionally, the
concept of diminishing marginal utility highlights the importance of not
overextending resources on too many varieties of a product. Applying these
principles in real-world business contexts, such as my experience with
marketing decisions, reinforces their practicality and relevance in ensuring
sustainable growth and profitability.
Word Count : 750
References
Mankiw, N. G. (2021). *Principles of Economics* (9th ed.). Cengage Learning.
Bade, R., & Parkin, M. (2021). *Foundations of Economics* (9th ed.). Pearson.
