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.
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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. Marginal costs tend to decline as the unit volume of production increases, because the producer can take advantage of volume discounts on purchased materials, and because it gains experience from producing in high volumes, making it more efficient.