Marginal Benefit

Marginal Benefit

What is Marginal Benefit?

Definition: Marginal benefit is the advantage or enjoyment that is obtained by consuming one additional unit of a product. This benefit typically decreases as more units are consumed.

What does marginal benefit mean?

The utility of a good or a service is based on the benefit that the consumer derives from it and not on its price. Let us consider the example of a good that is being sold for $10. An individual may be willing to pay $15 for this product. In other words, the marginal benefit is higher than the price by $5.

For many products, the marginal benefit falls as additional units are consumed. In this example, the consumer may be willing to pay only $10 for the second unit. The third unit’s marginal benefit may be even lower at $8. So, if the seller keeps the price constant at $10, only two units will be sold.

The sale of the first unit resulted in a “consumer surplus” of $5 as the marginal benefit ($15) exceeded the sale price of $10 by that amount. For the second unit, the marginal benefit and sale price were the same at $10. The third unit was not purchased as the marginal benefit ($8) was less than the selling price.

Example of marginal benefit

On a hot and sunny day, Martin buys ice cream for $5. After he finishes the ice cream, he buys more. Although Martin wants to eat more ice cream even after the second purchase, he isn’t willing to pay an additional $5. That’s because the marginal benefit of consuming the third ice cream is less than $5.

Martin’s decisions can be used to understand the manner in which the concept of marginal benefit works. In most instances, the consumption of additional units of a product leads to a diminishing level of satisfaction. If the third ice cream had been available at $3, Martin may have been willing to buy it as the marginal benefit that he would have obtained from its consumption could have matched the price.

Summary

The marginal benefit is the additional satisfaction from consuming an extra unit of a product or a service. This sum indicates the maximum that a consumer is willing to pay for the purchase of an additional unit.