What is a Marginal Benefit?

John Lister
John Lister
Businessman giving a thumbs-up
Businessman giving a thumbs-up

Marginal benefit is the benefit that a consumer gets from one additional unit of a commodity. It is sometimes also described as marginal utility. The concept of marginal benefit can sometimes help explain economic patterns that appear counterintuitive.

The idea of marginal benefit is one of the key factors in the way consumers make decisions. In theory it is one two main factors along with cost when it comes to purchasing decisions. This is because economists generally assume that customers make marginal decisions. This means they make each purchasing decision individually rather than, for example, deciding at the start of the year how many units of a product they will buy during the year.

One method of making economic assumptions about consumer behavior is to work on the basis that a consumer choosing between two similar products will choose the cheaper one. If they have the same price, the customer will go for the one that offers the most marginal benefit. In reality, both factors will have an effect simultaneously, while other factors, such as loyalty to a retailer or the quality of service, may have an effect.

Economists also usually work from the theory of diminishing marginal utility. This states that the more a consumer has of a product, the less marginal benefit they get from each additional unit. For example, a householder with no armchairs may get a lot of benefit from buying an armchair, and almost as much benefit from buying a second armchair. The more armchairs he buys, the less likely it is that he'll ever have enough visitors to use the extra armchair. It's even possible that at some point, the marginal benefit will become negative as one more armchair would cause more hassle by obstructing movement than it would benefit in seating a guest.

The pattern of diminishing marginal benefit is not consistent for all products. This can lead to some initially confusing economic situations. One case is the way marginal benefit compounds the effects of scarcity. For example, although water is vital to life and diamonds are purely decorative, diamonds are much more expensive. This is because as long as you have enough water to meet your basic needs, an extra liter or a liter less makes little difference to the use you can get from the water. However, an extra diamond or one diamond less will greatly affect the use you can get from the diamonds, whether that be giving them as gifts or exchanging them for other goods or services.

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