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What is Marginal Benefit

What is Marginal Benefit

What exactly is marginal benefit and how does it affect our choices? How is it calculated? Read to know all about it.
BusinessZeal Staff
Every choice we make, comes with its share of benefits and pitfalls. Economics is devoted to the study of choices which people make and their consequences. Be it an individual, a family, or a business, the choices we make determine our future. Ultimately, all these choices are motivated by how we profit from them. There is a school of thought in economics called utilitarianism, which analyzes what every choice costs a business and how it benefits a consumer. It also studies how a consumer's choice stops offering benefits after a product is consumed in excess. The idea of marginal benefit and cost are the central concepts of this utilitarian theory.

Marginal cost is the amount of money spent by a business to produce one extra unit of their product. It is the excess cost of manufacturing for one extra product produced. It could also be seen as the marginal cost that a consumer bears to purchase one more extra unit of the same product.

Definition

In the simplest of words, marginal benefit is the improvement in total satisfaction associated with the increased consumption of a good. Its nature need not be purely monetary. It can be pure satisfaction of the consumer or an improvement in health and well-being. The word 'marginal' is crucial here as it points towards the effect of small increase in consumption on the satisfaction or benefit that it provides the consumer.

In economic theory, there is the law of diminishing marginal utility which says that the benefit derived from the consumption of any good or service decreases with the number of consumed goods. For example, your first ice cream cone after a day's work is heavenly, the second is satisfying too, but after the third it tends to be nauseating. An excess of anything creates an imbalance and pleasure and satisfaction lie in moderation. Hence the marginal private benefit derived by a consumer tends to decrease as he goes on purchasing more and more of it, until it stops being beneficial. It cannot be measured exactly as the returns aren't always monetary. While the benefit decreases after every new purchase of the same good, the marginal cost goes on increasing. Businesses make the most profit when the benefit equals cost or is slightly more than it.

So there is no precise formula for quantifying the benefit but roughly it can be measured as the increased benefit, divided by the increase in consumption. By quantifying the benefit derived from the purchase of the service or product and dividing it by the increase in purchased number of that product, the benefit may be calculated.

Thus, analyzing the marginal benefit of a choice beforehand can help an individual or a business to choose the best alternative in front of them. There are pros and cons of every choice which we need to analyze and utilitarian philosophy provides us with a framework to make the right choice. This idea helps economists analyze consumer mentality. It helps them analyze the subtle relation between consumer satisfaction and the quantity of goods purchased. More is not always and necessarily good. There is a thin line between satisfaction and gluttony that should not be crossed. That is what the law of diminishing marginal utility or benefit tells us.