What is a Marginal Benefit
A marginal benefit is an additional satisfaction or utility that a person receives from consuming an additional unit of a good or service. A person's marginal benefit is the maximum amount he is willing to pay to consume that additional unit of a good or service. In a normal situation, the marginal benefit decreases as consumption increases.
BREAKING DOWN Marginal Benefit
Also referred to as marginal utility, a marginal benefit applies to any additional unit purchased for consumption after the first unit has been acquired. The utility is a term used to describe the level of satisfaction a consumer has assigned to the unit being consumed. Often expressed by the number of dollars a consumer is willing to spend for a unit, utility assumes a consumer finds a minimum amount of intrinsic value equal to the dollar amount paid for the item. For example, if a person purchases a burger for $10, it is assumed the consumer is obtaining at least $10 worth of perceived value from the item.
Falling Marginal Benefit
As units are consumed, the consumer often receives less utility or satisfaction from consumption. Using the aforementioned example, assume there is a consumer who wants to purchase an additional burger. If this consumer is willing to pay $10 for that additional burger, then the marginal benefit of consuming that burger remains equal to the initial purchase of $10. However, if the consumer determines he is only willing to spend $9 on the second burger, the marginal benefit is $9. The more burgers the consumer has, the less he wants to pay for the next one. This is because the benefit decreases as the quantity consumed increases.
Marginal Benefit and Unit Pricing
Even though the consumer is willing to pay $10 for the burger, $10 is not necessarily the burger's price; the price is determined by market forces. The difference between the market price and the price the consumer is willing to pay when the perceived value is higher than the market price is called consumer surplus. In cases where the consumer perceives the value of an item to be less than the market price, it often results in the consumer choosing not to proceed with the transaction.
Items Without Changes to Marginal Benefits
Not all products are subject to changes in their perceived value. For example, prescription medication can retain its utility over the long term as long as it continues to perform as needed. Additionally, the marginal benefits of certain staple goods, such as bread or milk, also remain relatively consistent over time.
Marginal Benefits for Businesses
Marginal benefits have applications for businesses, especially when it comes to marketing and research. Companies need to consider that a customer may compare the marginal cost of an additional purchase to the marginal benefit. A marginal cost is an additional cost incurred when producing a subsequent unit. Using the example above, if a customer buys a burger at $10 and a second at $9, he might place a marginal benefit of $9 on the second burger and may buy it given the marginal cost of $9. But if the customer gets full after only one burger, the marginal cost of $9 will outweigh the benefit, and he might not buy it. Companies can use the research they conduct into marginal benefits for the best possible price point for any deal. Companies can also use this research to find out what the additional expenses are for selling a second item relative to the first.