Marginal benefit and cost are key economic principles used by firms and consumers to maximize utility. For producers, marginal benefit is the market price of the good, while for consumers, it is the utility gained from consuming the last unit. Both groups aim to produce or consume until marginal benefit and cost are equal. An example is customers at a donut shop, who will eat donuts until they are full, and the price they are willing to pay for an additional donut decreases as more are consumed. Stores may offer lower prices to meet customers’ marginal benefit.
Marginal benefit and marginal cost are related in several key ways within manufacturing and production, investment, and consumption. Marginal cost (MC) is the cost of the last unit produced or consumed, and marginal benefit is the utility earned from that last unit. Both marginal benefit and marginal cost are economic principles that firms and consumers employ when trying to maximize their utility. In both groups, this generally means producing or consuming until the two values are equal to each other.
For manufacturing companies or producers, the marginal benefit is the market price of the good, or the amount they will get from making a sale. Marginal cost is the cost of producing the last additional unit, or the change in cost divided by the change in quantity. Firms generally act to maximize their profits, and will rarely, if ever, produce goods when the costs of production exceed the benefits they would receive.
The marginal benefit to consumers is the utility they will get from consuming the last unit, which is often the maximum price they would be willing to pay for that unit. In contrast, the MC is the actual cost of that extra unit. People will generally consume until their marginal benefit and marginal cost equal each other.
An example of this tradeoff between marginal benefit and marginal cost would be customers at a donut shop. While the first donut will likely be worth a lot to the customer, either in price or in utility and happiness, the 17th donut eaten is likely to result in negative utility and unhappiness as well as additional cost. The second donut could also increase utility, but by a smaller amount than the first. Customers will eat donuts until they are full, at which point they will no longer gain utility from additional donuts.
The price any customer is willing to pay for an additional donut will decrease as more donuts are consumed. Stores are often aware of this fact, and will offer additional donuts to lower prices, lowering marginal cost to meet the marginal benefit customers will receive from additional consumption. If the marginal cost exceeds the marginal benefit, then customers will not be willing to pay that cost. On the other hand, if customers are willing to pay more than the actual cost, this is known as consumer surplus.
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