What does marginal effect mean?Illustration of the concept of the law of economic decreasing and increasing

LifeIn Chinese, you love to eat cake, and after eating the first piece of cake, you will get the satisfaction of taste buds and spirit, which is what economists call "utility".

But as you eat more and more, the satisfaction you get will become less intense and flatten out.

The fifth cake will give you far less satisfaction than the first, and you will even feel bored by the tenth, let alone the fifteenth and twenty.

What does marginal effect mean?

• "Marginal" means the edge of something.
• The satisfaction that each piece of candy brings is marginal utility.
• The marginal utility of the pie is the utility of the last piece of the pie.

Marginal utility gained from getting along ▼

1. In a romantic relationship, the marginal utility you get in determining the relationship is 80%;
2. During the love period, you get 100% marginal utility;
3. Over time, you start to hate each other, and the marginal utility at this point is 0%;
4. After that, disgust turns into disgust, and the marginal effect is negative.

What is the concept of the law of marginal effects?

I met bosses from all walks of life, and most of them wanted to be bosses.

We all know the scale effect, the larger the transaction volume, the lower the amortized cost and the higher the profit.

So want to make it bigger and bigger.

But there are many bosses with an output value of hundreds of millions. They don't know the marginal effect. They have never heard of the marginal effect.

Marginal utility is a complex principle.

Simply put, size and profit are not directly proportional.

We know low-end manufacturing bosses, most of whom have diminishing profits.

• When they open a production line, they can make $200 million a year.
• Opened two production lines, with an annual profit of 150 million.
• When it opened three production lines, it lost money.

Do you know why?

• rely on科学Management and scale advantages, high-end manufacturing such as smartphones and new energy vehicles increased slightly.
• The initial investment is high, the car is expensive, and the subsidies are still at a loss.
• However, when the continuous investment reaches a critical point, the supporting process management of the industrial chain has matured.
• Then, even though he sold the price of the cabbage, he still earned it.
• Entering the Red Sea, the price is reduced, the cost is increased, and it is not easy to sell in the end.

What does diminishing marginal effect mean in business?

The most intuitive marginal utility, such as a milk tea shop, sells 100 cups and 200 cups, the rent and labor costs are fixed, and the marginal cost of the middle 100 cups is very low.

If the store's carrying capacity is only 200 cups, and selling 250 cups requires expanding the store and adding employees, the marginal cost will increase.

• softwareThe marginal cost of the industry is negligible, which mainly increases the after-sales cost of customer service.
• When you scale up production, it's often an industry flashpoint.
• Everyone is doing it, competition is fierce, profits are falling,Internet marketingLabor costs increase, and even inventory is overstocked, and investment is too much.

If you can't sell it, you will lose money, that's how we understand it.

• TU mark total utility▲
• MU denotes marginal utility (derivative of total utility);
• Q represents the quantity of the item.

it's allSEO, SEMWeb Promotion,FacebookThe same is true for the decline in profit from advertising:

The blue ocean market is profitable from the beginning (the life cycle of each industry is about 3-5 years).

After the bonus period, the competition is fierce, the marginal effect will be diminishing, and the performance and profit will decline significantly.

When we understand this truth, our hearts are relieved.The next development direction is definitely to follow the trend - catch the trend!

What does the law of diminishing marginal effects indicate?

From the perspective of marginal revenue, the scale of the return on investment will continue to expand and will reach a critical point where the profit is the highest.

After reaching a tipping point, the rate of return cannot keep up with the investment.

The result of blind expansion is likely to bring losses.

In economics, there is an easy-to-understand example of marginal benefit:

1. You are dying of thirst. At this time, a water seller appears. His water is 50 yuan a cup, and you will buy your first glass of water without hesitation.
2. At this point, the $50 water benefits are the highest for you, but the benefits of a second glass of water taper off until you finish your third glass.
3. The fourth cup does not feel thirsty, you will not spend 50 yuan to buy a cup of water at all, which belongs to the diminishing margin.

An example of the marginal effect of the law of economic growth

Scale effects (expanded to investment here) In many fields and industries, there is no benefit without scale.

For example, if you go to open a store, the decoration is too poor, the investment is too low, no one buys your products, your profit is close to zero, but it will increase the investment to a "certain range", such as better decoration, advertising, your Profits will increase rapidly, and to a large extent, this is also an increase in marginal utility.

This is especially true in the Internet industry, where the market is more important than profit.

like WeChat andAlipayLike the red envelope wars of Didi Kuaidi’s subsidy wars, the rapid expansion of this scale does not require the market in exchange for profits, but it is actually doomed to marginal utility.

What does increasing marginal effect indicate?

We believe that all utilities increase first and then decrease (increase first and then decrease), and the inflection point in the middle is important.

Whether you can grasp the position of the inflection point well determines whether your consumption can achieve the greatest satisfaction and whether your investment can exert the greatest effect.

What would happen if marginal utility increased instead of decreasing?

The following example illustrates the law of diminishing marginal utility:

• Tired of the same place;
• Touched first love, the deepest impression;
• "One blow, and then decline, and exhaustion";
• "All beginnings are hard";
• "A good start is half the battle";

What if marginal utility was not decreasing but increasing?

• The result is that the more you eat, the more addictive you become!
• Eating XNUMX steamed buns is not enough, you will become a super fat man!

There are examples of increasing marginal utility in this world:

• In reality, some addictive products
• The more you use it, the more addictive it becomes, and many addicts would rather go bankrupt and sell their possessions, but it is difficult to give up an addictive product.
• In this regard, we might be lucky to live in a world of diminishing marginal utility.