Marginal benefit definition
/What is a Marginal Benefit?
Marginal benefit is the incremental increase in the benefit to a consumer caused by the consumption of one additional unit of a good or service. As a consumer’s consumption level increases, the marginal benefit tends to decrease (which is called diminishing marginal utility), because the incremental amount of satisfaction associated with the additional consumption declines. Thus, the marginal benefit experienced by a consumer is highest for the first unit of consumption, and declines thereafter. This information can be used by a business to set price points to align with the marginal benefit experienced by its customers when they buy more than one unit of a product. For example, a steep discount could be offered to buy a second unit when the marginal benefit declines at a steep rate.
Example of Marginal Benefit
As an example of marginal benefit, a consumer is willing to pay $5 for an ice cream, so the marginal benefit of consuming the ice cream is $5. However, the consumer may be substantially less willing to purchase additional ice cream at that price – only a $2 expenditure will tempt the person to buy another one. If so, the marginal benefit has declined from $5 to $2 over just one extra unit of ice cream. Thus, the marginal benefit declines as the consumer's level of consumption increases.
Related AccountingTools Course
Marginal Benefit vs. Marginal Cost
Marginal benefit is the incremental increase in the benefit to a consumer caused by the consumption of one additional unit of a good or service. A related concept is marginal cost, which is the incremental increase in cost incurred when producing an additional unit of a good or service. The key differences between these concepts are as follows:
Purpose. Marginal benefit helps in assessing the value or advantage of consuming extra units of something, while marginal cost helps in understanding the expense associated with producing additional units, which impacts profitability.
Calculation. Marginal benefit is calculated as the change in total benefit divided by the change in quantity consumed, while marginal cost is calculated as the change in total cost divided by the change in quantity produced.
Role in decision-making. Marginal benefit guides consumption decisions, while marginal cost guides production decisions.
Diminishing returns vs. rising costs. Marginal benefit decreases as more units are consumed, while marginal cost typically increases as more units are produced.
In summary, marginal benefit focuses on the advantages or satisfaction from additional consumption, while marginal cost deals with the expenses involved in additional production. Balancing these two is essential for maximizing economic efficiency.