What Is Marginal Benefit?
A marginal benefit is a maximum amount a consumer is willing to pay for an additional good or service. It is also the additional satisfaction or utility that a consumer receives when the additional good or service is purchased. The marginal benefit for a consumer tends to decrease as consumption of the good or service increases.
In the business world, the marginal benefit for producers is often referred to as marginal revenue.
- Marginal benefits are the maximum amount a consumer will pay for an additional good or service.
- A marginal benefit is also the additional satisfaction that a consumer receives when the additional good or service is purchased.
- The marginal benefit generally decreases as consumption increases.
- When a consumer is willing to pay higher than the market price for a good or service, it is known as consumer surplus.
- The marginal benefit of some products that are necessities, such as medication, does not decrease over time.
- Companies can use the research they conduct into marginal benefits for the best possible price point for any deal.
Understanding 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 term utility is 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.
To demonstrate this, consider the example above. Assume there is a consumer who wants to purchase an additional burger. If this consumer is willing to pay $10 for that additional burger, the marginal benefit of consuming that burger is equal to the initial $10 purchase.
However, if the consumer decides they are only willing to spend $9 on the second burger, the marginal benefit is $9. The more burgers the consumer has, the less they want 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. This is not to be confused with economic surplus.
In cases where the consumer perceives the value of an item to be less than the market price, a consumer may end up not proceeding with the transaction.
Items Without Changes to Marginal Benefit
Not all products are subject to change when it comes to 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.
Going back to the example above, if a customer buys the first burger for $10 and a second at $9, they may 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 they may 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.