Marginal BenefitDefinition and Why it Matters
What is Marginal Benefit?
Marginal Benefit is the highest or maximum amount that a buyer is willing to pay for every extra unit of product sold.
Marginal benefit is otherwise known as marginal utility and can also refer to the satisfaction that a customer gets for purchasing the additional product or service.
Marginal benefit decreases as the rate of consumption increases although some products that are considered as necessities have marginal benefits that do not decrease over time.
For producers, the marginal benefit is also known as the marginal revenue in the business world.
Understanding Marginal Benefit
For the marginal benefit to be applied to the extra unit purchased, the first unit must be acquired beforehand.
The term marginal utility, which is also another term used to describe marginal benefit, refers to the satisfaction a customer receives for buying the extra unit.
Research on marginal benefits is required by companies so that they can establish a pricing strategy for the specific units they intend to sell and determine the additional expenses that will be incurred to produce and sell these additional units.
Although marginal benefit or utility is expressed in dollar terms, it has an accompanying intrinsic value – the measure of what is perceived to be the worth of a particular product.
So if someone buys a computer for $900, the buyer perceives the value of the computer purchased to be $900.
Falling Marginal Benefit
In purchasing an item, the marginal benefit is considered to be the highest when an item is first purchased but as more items are bought, the marginal benefit decreases.
This is because the satisfaction a person gets in the additional unit declines as the subsequent units are bought.
For example, a consumer who buys a laptop for $900 will have a marginal benefit of $900 from the single unit purchased.
But should you sell an additional laptop for $900, the consumer will no longer be interested in buying the additional unit for the same price but might take it if the price drops to $750.
As shown in this example, the marginal benefit of the additional unit has decreased from $900 to $750.
Marginal Benefit and Unit Pricing
A consumer surplus occurs when the value of the product is less than what the consumer is willing to pay.
This means that the pricing of specific units of products are driven by market forces and although in the example above the consumer is willing to pay $900 for the laptop, it is not its actual price.
A customer’s perceived value of an item is an important factor because when they perceive the item to not be worth its market price, they will not go ahead with any purchase at all.
Items Without Changes to Marginal Benefit
Goods or services considered to be necessities do not decrease in value over time.
For example, the marginal benefit of medicines, bread, milk, and other staple foods remain constant because people need it.
There is no question of whether or not they can do without the product just as long as they are needed.
Marginal Benefits for Businesses
Conducting research on marginal benefits is greatly advantageous for companies because the results of this research can help them determine the price point of their products at which they can sell them more strategically.
Also, the cost of selling an additional product also needs to be considered.
Some customers make comparisons of the marginal cost – the cost of production for one additional unit – against the marginal benefit.
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Rutgers Continuing Studies " Concept of Marginal Benefit and Marginal Cost" Page 1 . January 4, 2022
Harper College " The Economizing Problem: Making Choices" Page 1 . January 4, 2022
Washington State University "Six Perspectives on Nature in Environmental Thought & Policy: A Spectrum of Worldviews" Page 1 - 18. January 4, 2022