Economics

# Marginal Benefit vs Marginal Cost

## Mendy Wolff

Subject Matter Expert

This article looks at marginal benefit vs marginal cost and the formula to calculate them. Read also about the different components, examples, and faqs.

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If you were a company and there was a way to maximize profits, would you want to know it? Marginal benefit and marginal cost are essential to know in the business world. We'll thoroughly go over both with examples.

## Marginal Benefit and Marginal Cost

The marginal benefit and marginal cost are measurements of the cost or value of adding a unit of goods. The marginal benefit arises from the buyer's point of view, as it measures the cost a consumer is willing to pay for one more unit of goods. Marginal cost stems from the seller's point of view, as it calculates the added cost for the seller in producing one more unit of goods.

Marginal benefit and marginal cost are both essential for business managers in calculating the optimal amount of production.

For a business to maximize profits, it calculates its marginal benefit and its marginal cost. If they can produce one more unit of a good and sell it at a higher price than its marginal cost, it can increase profits by increasing its output. However, suppose the additional units produced will not sell at a higher price than the marginal cost of production. In that case, it should not increase its output. Each additional good produced will cost the business more than it can earn from selling each additional unit.

The relationship between marginal cost and marginal benefit is pretty dynamic. This is because the marginal cost for each unit can vary depending on the economies of scale. For example, as a company scales production, the cost of producing each additional unit decreases. And on the consumer side, the marginal benefit changes with each additional unit consumed; the outcome is that with each unit bought, the less money the consumer is willing to pay for the next unit. So companies have to constantly figure out the "max amount" of money a consumer is willing to pay for the added unit.

Market equilibrium happens when marginal cost equals marginal benefit. This simply means that sellers produce the exact amount of goods buyers want, and no benefit is wasted. When the market is not at equilibrium, there is an inefficiency occurring. The number of units produced should increase or decrease.

## What Is Marginal Cost?

Marginal cost is the additional cost a producer or any business incurs by adding one more unit of production or sales. For example, suppose a company manufactures wireless headphones and increases its production output from 10,000 headphones a week to 12,000 a week. The additional cost of producing the added 2,000 headphones will be the marginal cost.

The marginal cost is a crucial component in finding a company’s profit maximization. It helps managers find the optimal amount of production for the business to become most profitable.

### Marginal Cost Formula

Marginal cost is the change in total cost divided by the change in the number of units produced.

$\frac{\text{cost change}}{\text{quantity change}} = \text{marginal cost}$

### How To Calculate Marginal Cost

Let's use an example to see how we calculate the marginal cost:

Let us assume HeadPhone Inc. is a manufacturer of wireless headphones. It currently manufactures 10,000 headphones for a total cost of $10,000 every month. Suppose HeadPhone's business managers calculate that producing 12,000 headphones would cost$11,000.

The change in total cost ($11,000 -$10,000) divided by the change in units manufactured (12,000 units – 10,000 units) yields the marginal cost of the additional 2000 headphones.

$\frac{\1000}{\text{2000 units}}= \ 0.50$

## 3 Different Marginal Benefits and What They Mean

As we now know, the marginal benefit calculates the effect of each additional unit consumed. This leads us to the three different outcomes that can happen when a consumer adds a unit of goods or services to their purchase:

### 1. Positive Marginal Benefit

A positive marginal benefit when consuming more units of a good or service leads to added satisfaction or happiness. For example, a second slice would bring additional satisfaction to someone who likes eating pizza for lunch. This makes the marginal benefit from the added slice positive.

### 2. Negative Marginal Benefit

A negative marginal benefit occurs when consuming too much of a particular good has a negative outcome. For example, the sixth slice of pizza will cause the person to get sick. So the marginal benefit from adding the 6th slice of pizza is negative.

### 3. Zero Marginal Benefit

Zero marginal benefit occurs when the consumer is indifferent to adding another unit. There is no additional satisfaction from an extra unit, but there is also no adverse outcome. For example, let’s consider an already full-on-pizza individual. If they order a third slice of pizza and can't take the pizza to-go but would not get sick from eating an additional slice, then the marginal benefit is zero.

## Maximizing Marginal Benefits

Marginal benefit is always the highest during the consumption of the first unit bought and decreases with each additional unit. The decline in marginal benefit is simply a function of the diminishing rate of satisfaction associated with the consumption of each additional unit. Again, that is why the marginal benefit is thought of as the "max amount" a consumer is willing to pay. Since the satisfaction decreases with each additional unit, the amount one is willing to spend on it also decreases.

### Buy One, Get One Half-Off

Understanding the consumers' marginal benefit explains the often used "buy one, get one half-off" store promotion. The consumer is not willing to pay as much money for the second pack of cookies as the first pack of cookies because of the diminishing utility. So if the store wants to sell more cookies to that customer, they will have to decrease the price for the second unit, since the customer’s marginal benefit decreases.

## Marginal Cost and Marginal Benefit FAQs

### Should the Marginal Cost Be More Than Your Marginal Benefit?

No. If the marginal per unit cost is greater than the marginal benefit received, the company will lose money.

The general rule is:

• Marginal Revenue < Marginal Cost = Decrease Production

• Marginal Revenue > Marginal Cost = Increase Production

• Marginal Revenue = Marginal Cost = Profit Maximized

### How Do I Calculate the Marginal Cost?

Marginal cost is the change in total cost divided by the change in the number of units produced.

$\frac{\text{cost change}}{\text{quantity change}} = \text{marginal cost}$

### How Do I Calculate the Marginal Benefit?

Marginal benefit is the change in utility received by the change in the number of units consumed.

$\frac{\text{benefit change}}{\text{unit change}} = \text{marginal benefit}$

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