What Is a Marginal Benefit in Economics, and How Does It Work?

Marginal Benefit

Investopedia / Xiaojie Liu

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.

Key Takeaways

  • Marginal benefits represent the maximum cost a consumer will pay for an additional good or service.
  • A marginal benefit also represents the incremental satisfaction that a consumer receives when an additional good or service is purchased.
  • The marginal benefit generally decreases as consumption increases.
  • 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.

Marginal Benefit

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.

Marginal benefit may be expressed as the number of dollars a consumer is willing to spend for additional units, or with imaginary units such as "utils." This 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. If they are willing to purchase a second burger for $5, but not $6, then the marginal benefit from a second burger must be valued somewhere between $5 and $6 dollars.

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.

Law of Diminishing 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.

Formula for Marginal Benefit

Marginal benefit can be determined using the slope of the demand curve or the following formula:

Marginal Benefit = Total additional benefit Total number of additional goods consumed \begin{aligned}\text{Marginal Benefit}=\frac{\text{Total additional benefit}}{\text{Total number of additional goods consumed}}\end{aligned} Marginal Benefit=Total number of additional goods consumedTotal additional benefit

Types of Marginal Benefits

There are three possible value ranges for marginal benefits.

Positive Marginal Benefits

Most goods have a positive marginal benefit, meaning that the consumer feels a net benefit from consuming each additional unit of that good. Although the marginal benefit may diminish over time, the consumer still feels better off with additional consumption.

Negative Marginal Benefits

A negative marginal benefit means that the consumer is worse off if they consume an additional unit of the good. Examples include alcoholic drinks or unhealthy snacks, where additional consumption causes reduced satisfaction.

Zero Marginal Benefits

A good with zero marginal benefits is one where a consumer feels no change in satisfaction with additional consumption. This may be the case if a good has separate qualites that both improve and reduce satisfaction, resulting in no net benefit.

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.

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.

Marginal Benefit vs. Marginal Cost

Marginal benefit is similar to the concept of marginal cost, the incremental cost for producers of creating additional units of a good. As with marginal benefits, marginal costs tend to decrease as the total number of units rises.

For example, imagine a hypothetical factory that produces paper cups. The production process requires $1 million of machinery, capable of producing up to 100,000 paper cups per day. In addition, the production process requires $1 in paper and glue as the materials for each paper cup.

If the factory currently produces less than 100,000 cups per day, the marginal cost for each additional cup is only $1. Fixed costs, such as machinery and facilities, are not included. However, if the factory is already working at full capacity, the marginal cost of producing more cups may be well over $1, reflecting the costs of additional machinery or changes to the production process.

How Do You Calculate Marginal Benefit?

The marginal benefit can be calculated from the slope of the demand curve at that point. For example, if you want to know the marginal benefit of the nth unit of a certain product, you would take the slope of the demand curve at the point where current consumption is equal to n.

What Does Marginal Benefit Mean for Producers?

For manufacturers and other suppliers, the marginal benefit for a good represents the incremental profit that they can make by selling additional units of a certain good. This is not necessarily the same as the expected per-unit profit. For example, if a company decides to sell an additional 1,000 bottles of a soft drink, but expects half of them to go unsold, the marginal benefit would be half of the per-unit profit margin.

What Is the Principle of Diminishing Marginal Benefits?

The principle of diminishing marginal benefit, also known as the law of diminishing utility, states that the benefits of consuming a good decrease with additional consumption. Although each additional unit represents a net benefit from the consumer, the benefit is lower than the satisfaction received from prior consumption.

The Bottom Line

Marginal benefit represents one of the most basic concepts of microeconomics. This is the value, or satisfaction, that an economic actor gains from consuming additional units of a particular good. Marginal benefit also determines how much the consumer is willing to pay to consume more of a particular good.

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