Marginal Benefit vs. Marginal Cost: An Overview

Marginal benefit and marginal cost are two measures of how the cost or value of a product changes. Marginal benefit impacts the customer, while marginal cost impacts the producer. Companies need to consider both concepts when they manufacture, price, and market a product.

Marginal benefit refers to the maximum amount of money a consumer is willing to pay for an additional good or service. The consumer's satisfaction tends to decrease as consumption increases. Marginal cost, on the other hand, is the change in cost when an additional unit of a good or service is produced.

Marginal Benefit

澳洲幸运5开奖号码历史查询:Marginal benefit is a small but measurable benefit to a consumer if they use an additional unit of a good or service. It usually declines as a consumer decides to consume more of a single good. Marginal benefit is often𒁃 expressed as the dollar amount the consumer is willing to pay for each purchase. The formula for marginal benefit is:

Marginal Benefit = Change in Benefit ÷ Unit Change

Consider a consumer who purchases a ring for her right hand for $100. Since she doesn't need two rings, she won't spend the additional $100. But she may be convinced to at $50. For this customer, the marginal benefit of the first ring is $100, while the marginal benefit of the second ring is $50.

Another way to think of marginal benefit is to consider the sati𝔉sfaction that a consumer gets from each subsequent addition. There are three primary types of marginal benefit:

• Positive Benefit: Marginal benefit increases as additional units are consumed. The popular campaign slogan "Betcha can't eat just one" referred to marginal benefits that may potentially increase after consuming the first potato chip.
• Negative Benefit: This is when consuming an additional unit causes consequences and negative effects. Marginal benefit decreases as additional units are consumed. At some point, it decreases until it becomes negative. After eating the entire bag of potato chips, a consumer may feel sick if they eat another bag. The lessening of appeal for additional consumption is known as 澳洲幸运5开奖号码历史查询:diminishing marginal utility.
• Zero/Neutral Benefit: No marginal benefit is gained or lost with each additional unit. The consumer is indifferent to the next potato chip they eat; there is no additional happiness or dissatisfaction gained regardless of the next decision made.

Marginal Cost

Marginal cost is the inc🦩remental expense to the business if it produces one ad༺ditional unit. You can calculate marginal cost by using the following formula:

Marginal Cost = Cost Change ÷ Quantity Change

Let's say a company currently manufactures 100 shoes for a total cost of $10,000 ($100 each). It also costs $11,000 to manufacture 120 shoes. The change in total cost ($11,000 - $10,000) divided by the change in units manufactured (120 units - 100 units) yields the marginal cost of the additional 20 shoes ($1,000 ÷ 20 units = $50).

When considering marginal costs, 澳洲幸运5开奖号码历史查询:fixed costs are excluded unless the increase in output level pushes the company into a higher relevant range. In the example above, we assume that the company can manufacture up to 120 shoes. If this is the case, the marginal cost of $50 reflects only 澳洲幸运5开奖号码历史查询:variable costs. If the company needs to enter into a new lease to handle the growth, this fixed❀ cost ✅is included in the incremental cost of these additional goods.

If a company captures 澳洲幸运5开奖号码历史查询:economies of scale, the cost to produce a product declines as the company increases production. Let's say each🍬 shoe requires $5 of rubber, thread, and other materials. Each material order costs $25 for shipping and handling. If the company submits an order to make 10 shoes, the cost of the order 🧜is $75 (($5 x 10 shoes) + $25 shipping), and the cost per shoe is $7.50. If the company scales and can order materials for 30 shoes at once, the cost of the order is $175 ($5 x 30 shoes) + $25 shipping). Due to economies of scale, the cost per shoe is now $5.83.

The most basic profit maximization strategy is to compare a company's 澳洲幸运5开奖号码历史查询:marginal revenue and marginal cost. If the company can sell one addiಞtional good for more than the cost of that incremental good, the company can increase pro🔴fit by increasing output.

Marginal Benefit and Marginal Cosౠt in Public Policy

The concept behind marginal benefit and marginal cost extends beyond business. The relationship between the two also plays an important part in public policy. Elected officials must often evaluate and compare the marginal benefits of various public programs when evaluating how to spend money. If crime is high in a specific area, the marginal benefit of additional police resources may outweigh the marginal benefit of increasing transportation subsidies.

Because different initiatives have different marginal benefits, it is up to elected officials to determine how to allocate limited resources like taxpayer funds. Though it would be possible to eliminate specific problems within a city (i.e. 0% crime rate), the marginal benefit of allocating resources to other programs often outweighs the marginal benefit of concentrating on a single 🐈issue.

For example, let's say the cost to decrease theft from 500 annual cases to 400 annual cases is $100,000. It's up to public officials to determine what it would cost to get the number of annual cases down to 300 and what the benefit would be if these funds were instead spent elsewhere.

Marginal Benefit vs. Marginal Cost Example

Let's say BottleCo. manufactures water bottles. Last year, the company produced and sold 100,000 water bottles for $600,000. Each water bottle sold for $9. BottleCo is evaluating whether to increase production to 150,000 water bottles.

BottleCo expects to capitalize on some economics of scale by combining 澳洲幸运5开奖号码历史查询:raw material orders and leveraging existing equipment capabilities. It expects the total c🅰ost to produce 150,ܫ000 water bottles to be $825,000. The marginal cost per water bottle for these additional 50,000 additional units is $4.50 ($225,000 incremental cost ÷ 50,000 incremental units).

The company also performed 澳洲幸运5开奖号码历史查询:market research to better understand why customers would purchase additional water bottles. Most consumers stated the law of diminishing returns and didn't have as much incremenꦗtal marginal benefit for a second water bottle as they did for their first. Therefore, the average customer was only willing t💞o pay $5.50 for an additional water bottle.

Had BottleCo used pricing data from the original 100,000 water bottles manufactured, it would have said it would be unprofitable to make a water bottle for $6.00 and sell it for $5.50. However, the additional 50,000 units take advantage of economies of scale and leverage existing fixed costs. In this case, the marginal cost to produce the additional water bottles ($4.50/unit) is less than the marginal benefit a customer is expected to receive $5.50. Therefore, it would be profitable to increase production.

The Bottom Line

Marginal benefit and marginal costs are two ways to measure the potential benefits of producing an additional unit of a certain good. Marginal benefits are the additional benefits to consumers from consuming one additional unit of that good, while marginal costs are the costs of producing one more unit. Businesses and governments can use these two measures to forecast the profits from increasing production.