Marginal Utility vs. Marginal Benefit: An Overview
Marginal utility and benefit are closely-related concepts that describe how the usefulness of most goods changes with additional consumption. Marginal utility describes the benefit that an economic actor receives from consuming one additional unit of a good, while marginal benefit describes (in dollars) what the consumer is willing to pay to acquire one more unit of the good.
Marginal benefit can be described using cardinal numbers, while economists debate about whether marginal utility can be described using cardinal or ordinal ranking.
- Marginal benefit and marginal utility are concepts use to explain behavior of economic actors.
- Marginal benefit and marginal utility are closely aligned, and sometimes used interchangeably.
- Marginal utility describes the increased happiness or satisfaction that an actor derives from consuming an additional unit of a certain good.
- Marginal benefit describes the maximum price that an actor is willing to pay for an additional unit of a good.
- Both marginal benefit and marginal utility tend to decrease as an actor consumes more. This is called the law of diminishing marginal utility.
Utility is the term used in economic theory to describe why human beings act. Specifically, human beings act to maximize their utility—the satisfaction that they gain from life. All of these terms are tentative, since what seems like semantic differences in the definitions of "action" or "satisfaction" can actually have far-reaching implications when it comes to economic analysis and public policy.
Broadly speaking, human beings act purposefully to achieve conscious ends. For example, a person eats a sandwich because they are hungry, or donates a dollar to charity because they value compassion and want to help other people. Utility doesn't define what makes a person satisfied, only that the person acts to achieve satisfactory ends—life isn't completely reflexive.
Many neoclassical economic models directly measure marginal utility, assigning units of utility called utils. Others suggest that this is impossible, because measuring utility is individualistic and subjective. Only the order of preferences can be known, not the ratios between them.
Even more controversial are interpersonal comparisons of utility, which appear on many indifference curve models. The relative utility for different actors is directly compared with one another for analysis.
Since all resources—even time—are scarce, human beings have to make decisions about how to approach their utility. When presented with more than one unit of the same good, the economic actor necessarily puts the first good to use to satisfy his or her most valued end. The second unit goes towards the second most valued end and so on. Thus, the utility gained from each successive unit goes down. Economists refer to this as the law of diminishing marginal utility.
Diminishing marginal utility can be used to explain why demand curves are downward-sloping, the order in which people value certain outcomes, and how consumers communicate valuable information to producers and distributors through the price mechanism. This latter function is where marginal benefit comes into play.
Marginal utility is usually considered to diminish with each incremental unit of consumption. However, it is also possible for the marginal utility of some goods to be zero or even lower. An example might be alcoholic drinks: the first or second drink might have a positive marginal utility, but consuming the fourth or fifth drink might reduce the consumer's overall utility in the long run.
Most textbooks define "marginal benefit" as the highest amount that a consumer would be willing to pay for one additional unit of a good. This is distinct from the marginal cost, the price that the supplier pays to provide one additional unit of that good. Marginal benefit can be seen as a device used to capture marginal utility and apply it directly in a measurable way.
As long as the marginal benefit is higher than the sale price of a good, consumers will be better off by buying one more unit of that good. Rational consumers are expected to continue to purchase additional units of the good until the marginal benefit no longer exceeds price. Producers can increase production, raise prices or both.
In neoclassical microeconomic models, marginal benefit is typically measured in monetary amounts. It might suppose that the price of a good is five dollars but marginal benefit is $5.75, meaning that there exists a consumer surplus of 75 cents. Some economists believe that this can only be measured retroactively (after the price increases to $5.75 from five dollars, for instance, without a drop in demand).
Marginal benefit can also describe the additional income a company can earn by producing one more unit of a product. Another term for this quantity is marginal revenue.
Types of Marginal Benefit
Marginal benefit is often used to describe the benefits that a consumer enjoys by buying an additional unit of a certain good. However, the concept of marginal benefits can also be used to describe the producer's behavior.
On the producer side, marginal benefit refers to the additional economic value that can be extracted from producing an additional unit of a certain good. For example, if a can of soda sells for $1, then the marginal benefit of each can of soda is $1 minus the cost of production. However, it may be harder to sell the 1000th can of soda, requiring the producer to offer a discount for higher quantities. This means that the marginal benefit for production is likely to decrease for larger units.
The concepts of marginal utility and marginal benefit are very similar and are often used interchangeably. The main difference is in how these expressions are quantified: marginal utility is considered to be the additional happiness or satisfaction that an additional good brings to a consumer, which is difficult to measure practically.
In contrast, marginal benefit is considered to be the dollar value that a consumer would assign to an additional good, which can be deduced experimentally. For example, if a consumer is willing to buy an extra slice of pizza for $1, but rejects a price of $2, it can be deduced that the marginal benefit of an extra slice is somewhere between $1 and $2. The ability to express marginal benefit in dollar terms allows an increased level of objectivity to these measurements.
Marginal Utility vs. Marginal Benefit Example
To illustrate the distinction between marginal utility and marginal benefit, imagine a hypothetical person who consumes cupcakes from a local manufacturer. Consuming a cupcake will tend to make that person happier, but each additional cupcake results in a smaller increase than the prior cupcake.
Marginal utility and marginal benefit represent two different ways of "measuring" the benefit of each additional cupcake. Marginal utility seeks to express these benefits as abstract quantities of "satisfaction" or "utils." Although any such measurement is inherently arbitrary, it serves as a useful way of explaining the concept of diminishing marginal utility.
Marginal benefit and marginal utility express similar concepts, and are sometimes used interchangeably.
Marginal benefit, on the other hand, seeks to measure the same concept in a more objective way. While it is impossible to find out how much happiness a person derives from an extra cupcake, it is fairly straightforward to determine how much money the consumer is willing to pay for one.
If a person is willing to pay $0.50 for a second cupcake, but not $0.51, it is safe to say that the second cupcake has a marginal benefit to that person of fifty cents. Likewise, if a person is not willing to buy a cupcake for any price, the marginal benefit of the second cupcake is said to be zero (or lower).
Marginal benefit is sometimes used on the other side of the equation, to measure the benefits of additional units for the producer. Suppose the cupcake company produces 10,000 cupcakes that normally sell for $1 each, and the owner is considering an increase to 11,000.
Since it is harder to find enough buyers for larger quantities, the company may consider offering discounts or reduced prices. In this case, the marginal benefit of increasing production is equal to the expected income from each additional cupcake. This is sometimes expressed as the term marginal revenue.
What Is the Difference Between Marginal Utility and Marginal Cost?
Marginal utility refers to the increase in satisfaction that an economic actor may feel by consuming an additional unit of a certain good. Marginal cost refers to the incremental cost for the producer to manufacture and sell an additional unit of that good. As long as the consumer's marginal utility is higher than the producer's marginal cost, the producer is likely to continue producing that good and the consumer will continue buying it.
What Is the Difference Between Marginal Benefit and Marginal Cost?
Marginal benefit refers to the highest price a consumer is willing to pay for an additional unit of a certain good. As long as this number is higher than the marginal cost of producing that good, the consumer is likely to buy additional units until their marginal benefit decreases.
What Is the Marginal Benefit Formula?
The marginal benefit of a good can be calculated by dividing the total change in benefit by the total change in the quantity of that good. This can be expressed mathematically as
Marginal Benefit = (B1 - B2) / (Q1 - Q2)
Where B1 represents the consumer's total satisfaction before a change in quantity, B2 represents their satisfaction after the change in quantity, and Q1 and Q2 represent the quantities of that good.
What Happens When Marginal Benefit Equals Marginal Cost?
When the marginal benefit for a certain good is equal to its marginal cost, that means that the producing company would not see any net gains from producing more of that good. In that case, it would not make sense for the company to produce additional units, and they would likely direct their resources to other product lines.