Marginal benefit is an important concept in economics and decision-making. When it comes to making financial decisions, understanding the concept of marginal benefit is key.
Marginal benefit is the benefit that a consumer receives from consuming one additional unit of a good or service. By understanding the concepts, examples, types, uses, and how to calculate the marginal benefit, you will be able to make more informed decisions and maximize your profits.
So let’s get started and learn more about marginal benefits.
What is Marginal Benefit? (Marginal Benefit Definition)
The best definition of marginal benefit is the maximum amount a consumer is willing to pay for an additional good or service, or, in other words, the additional satisfaction or utility that a consumer obtains by purchasing it.
A marginal benefit is a concept in economics that refers to the additional benefit an individual or organization receives from consuming one more unit of a good or service.
In other words, the marginal benefit is the extra benefit that comes from consuming one more unit than what was previously consumed. This extra benefit is referred to as “marginal” because it only applies to the most recent unit of a consumed good or service.
For example, let’s say you’re shopping for shoes and find a pair you like for $100. You decide to purchase the shoes and get the full $100 worth of benefits from them. However, if you buy a second pair of shoes for $100, your marginal benefit would be the extra benefit you receive from the second pair of shoes beyond what you received from the first pair.
Marginal benefit is an important concept in economics because it can help explain why people make certain decisions, such as why they are willing to pay more for certain goods or services.
By understanding how people value different goods and services, businesses can better understand how much they should charge in order to maximize their profits.
Additionally, governments use the marginal benefit to design taxes and subsidies to ensure that their citizens get the maximum benefit from their resources.
Marginal Benefit Examples (Understanding Marginal Benefit with Example)
Recap: Marginal benefit is a person’s extra satisfaction or enjoyment from consuming an additional unit of a good or service.
Example 1:
A female student is deciding whether to buy two course handouts. She wants to buy the first handout for an elective course, which will boost her GP. Still, if she decides to buy a second core course handout, she will receive an automatic pass on the course. This additional benefit is the marginal benefit of buying the second handout.
Note: One important thing to understand about marginal benefit is that it decreases as a person consumes more units of a good or service. This is because, as a person consumes more units of a good or service, the additional benefit or utility they receive from each additional unit will generally be less than the benefit they received from the previous unit.
Example 2:
Baltimore loves ice cream and buys one scoop of ice cream for $5. The first scoop of ice cream gives him a lot of enjoyment and satisfaction, so the marginal benefit of buying the first scoop is very high. However, if he decides to buy a second scoop of ice cream for $5, the marginal benefit of buying the second scoop will be less than the marginal benefit of buying the first scoop because Baltimore has already received a lot of enjoyment and satisfaction from the first scoop.
Note: In economics, the marginal benefit is often used to help people decide how much of a good or service to consume.
Example 3:
Suppose a person is trying to decide how many tickets to a concert to buy. In that case, they might consider the marginal benefit of each additional ticket. If the marginal benefit of buying an additional ticket is high, they might be willing to pay more for it. However, suppose the marginal benefit of buying an additional ticket is low. In that case, they might decide not to buy it or buy only one ticket.
Bottom line: Understanding marginal benefit can be helpful for making decisions about how much of a good or service to consume, as it can help a person understand the additional benefit or utility they will receive from consuming an additional unit.
Understanding Marginal Benefit in a Business Concept
Businesses can use the concept of marginal benefit to make decisions about how much of a good or service to produce and sell.
By understanding the marginal benefit consumers receive from consuming their products, businesses and companies can determine the price at which they can sell their products and still be profitable.
For example: If a business produces and sells ice cream, it might use the concept of marginal benefit to determine the price at which it can sell each scoop of ice cream.
Suppose the marginal benefit of consuming one scoop of ice cream is high. In that case, the business might be able to charge a higher price for each scoop and still have customers willing to buy it. However, if the marginal benefit of consuming one scoop of ice cream is low, the business might need to lower the price to attract customers.
In addition to using marginal benefit to set prices, businesses can also use it to decide how much of a good or service to produce.
Takeaway: If the marginal benefit of a good or service is high, it may be worth it for a business to invest in producing more of it, as they will be able to sell it at a higher price and make a profit. And on the other hand, if the marginal benefit of a good or service is low, it may not be worth it for a business to invest in producing more of it, as the price they can charge for it may not be enough to cover the cost of production.
Marginal Benefit Formula (How to Calculate Marginal Benefit)
If you understand how to calculate marginal benefit, you can better understand how to maximize the value consumers get from their purchases and make better decisions when pricing goods and services.
Marginal benefit Formula: Change in total benefit ÷ Change in number of units consumed
To calculate the marginal benefit, you first need to determine the total amount of money a consumer is willing to spend on all units of a product or service. This amount is the consumer’s total utility or willingness to pay.
Once you have figured out the consumer’s total utility, you can calculate the marginal benefit by subtracting the amount spent on all units except one from the total utility.
For example, if a consumer is willing to pay $100 for 10 units of a product, the marginal benefit for each unit is calculated by subtracting $90 ($100 – $10) from $100, leaving you with a marginal benefit of $10 per unit.
Once you have determined the marginal benefit of each unit, you can then use this information to calculate the total benefit of buying multiple units. If, for example, the marginal benefit of each unit is $10, then the total benefit of buying 10 units is $100.
Marginal Benefit Application (How to Use Marginal Benefit in Business)
Marginal benefit is a concept used in economics that refers to the additional satisfaction gained from consuming one more unit of a good or service.
If you are considering purchasing a new car, you would need to calculate the marginal benefit associated with buying the car. To do this, you can compare the additional satisfaction you would gain from owning the car to the cost of purchasing it.
Say you want to buy a car that costs $60,000. The marginal benefit associated with the car would be the extra satisfaction or utility you get from owning the car minus the cost of the car.
If, for example, you determine that the extra satisfaction you would get from owning the car is worth $40,000 to you, then your marginal benefit would be $40,000 – $60,000 = -$20,000.
This means that buying the car would not be a good idea because it would actually cost you more than what it’s worth to you.
Another example of how to use marginal benefit is if you are considering taking a vacation.
To calculate the marginal benefit associated with taking a vacation, you would need to look at the additional satisfaction that you would get from taking a trip compared to the cost of taking the trip.
For example, if a vacation costs $1,500 and you determine that it will give you an extra $2,500 in satisfaction, then your marginal benefit would be $2,500 – $1,500 = $1,000.
In this case, taking the vacation would be worth it because the marginal benefit would be positive.
The Marginal Benefit Curve
The marginal benefit curve is a graphical representation of the relationship between the quantity of a good or service consumed and the marginal benefit that a person receives from consuming it.
It shows the amount of additional benefit or utility that a person receives from consuming one more unit of a good or service at different levels of consumption.
The marginal benefit curve typically has a downward slope, which means that the marginal benefit of consuming an additional unit of a good or service decreases as a person consumes more units.
This is because, as a person consumes more units of a good or service, the additional benefit or utility they receive from each additional unit will generally be less than the benefit they received from the previous unit.
Graphical Representation of the Marginal Benefit Curve
Here is a graphical representation of a marginal benefit curve:
In this graph, the vertical axis represents the marginal benefit that a person receives from consuming a good or service, and the horizontal axis represents the quantity of the good or service consumed.
As shown in the graph, the marginal benefit curve typically has a downward slope, which means that the marginal benefit of consuming an additional unit of a good or service decreases as a person consumes more units.
For example, at a low level of consumption (such as one or two units), the marginal benefit of consuming an additional unit of the good or service is relatively high.
However, as a person consumes more units of the good or service (such as five or six units), the marginal benefit of consuming an additional unit decreases. This is because, as a person consumes more units of a good or service, the additional benefit or utility they receive from each additional unit will generally be less than the benefit they received from the previous unit.
Types of Marginal Benefit
There are several different types of the marginal benefit that can be considered when evaluating the potential benefits of consumption.
1. Price-based Marginal Benefit:
A price-based marginal benefit is a maximum amount a consumer will pay for an additional unit of a good or service. This type of marginal benefit is determined by the price of the good or service being consumed.
2. Utility-based Marginal Benefit:
Utility-based marginal benefit measures the increase in total satisfaction derived from consuming one more unit of the good or service. Utility-based marginal benefit is determined by the utility derived from consuming an additional unit of the good or service.
3. Time-based Marginal Benefit:
Time-based marginal benefit measures the amount of satisfaction derived from consuming one more unit of the good or service in a certain amount of time. This type of marginal benefit takes into account the time involved with consuming an additional unit of a good or service.
4. Opportunity Cost-based Marginal Benefit:
Opportunity cost-based marginal benefit measures the benefit derived from not having to use an opportunity in order to consume an additional unit of a good or service. This type of marginal benefit compares the cost of forgoing the opportunity and consuming an additional unit of the good or service.
Marginal Benefit VS Marginal Cost (Difference between Marginal Benefit and Marginal Cost)
Marginal benefit refers to the additional benefit that a consumer gets by purchasing one more quantity of good(s) or service(s). It represents the extra enjoyment or satisfaction that a person gets from consuming an additional unit of a good or service.
On the other hand, marginal cost refers to the additional cost that a business incurs from producing one more unit of a good or service. It represents the increase in cost that a business experiences as a result of producing an additional unit of a good or service.
Both marginal benefit and marginal cost are important concepts in economics, and they are often used together to help businesses and individuals make decisions about how much of a good or service to produce or consume.
Marginal Benefit and Marginal Cost Example
If a business is considering producing one more unit of a good or service, it will need to consider both the marginal cost of production (the additional cost they will incur as a result of producing the additional unit) and the marginal benefit of consumption (the additional benefit or utility that consumers will receive from consuming the additional unit).
If the marginal benefit of consumption is greater than the marginal cost of production, it may be worth it for the business to produce the additional unit, as they will be able to sell it at a profit.
On the other hand, if the marginal cost of production is greater than the marginal benefit of consumption, it may not be worth it for the business to produce the additional unit, as they will not be able to sell it at a profit.
Takeaway:
The main difference between marginal benefit and marginal cost is that marginal benefit refers to the additional benefit or utility that a person receives from consuming one more unit of a good or service, while marginal cost refers to the additional cost that a business incurs from producing one more unit of a good or service.
Final Thought
Marginal benefit is the extra enjoyment or satisfaction you get from consuming a product. It helps you to decide how much of a product to consume because it tells you how much benefit you will receive from consuming an additional unit.
However, the marginal benefit decreases as a person consumes more units of a good or service because the additional benefit from each additional unit will generally be less than the benefit they received from the previous unit.