What Is the Relationship between Marginal Benefit and Marginal Cost?

M. Walker

Marginal benefit and marginal cost are related in several key ways within manufacturing and production, investment, and consumption. The marginal cost (MC) is the cost of the last unit produced or consumed, and marginal benefit is the utility gained from that last unit. Both marginal benefit and marginal cost are economic principles that businesses and consumers employ when trying to maximize their utility. In both groups, this usually means either producing or consuming until the two values are equal to each other.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

For manufacturing companies or producers, the marginal benefit is the market price of the good, or the amount that they will gain from making a sale. The marginal cost is the cost of production for the last additional unit, or the change in cost divided by the change in quantity. Businesses generally act to maximize their profits, and they will rarely, if ever, produce goods when output production costs exceed the benefits that they would receive.

The marginal benefit for consumers is the utility that they will gain from consuming the last unit, which is often the maximum price that 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 are equal to each other.

An example of this balance between marginal benefit and marginal cost would be customers at a doughnut shop. While the first doughnut will likely be worth a lot to the customer, in price or in utility and happiness, chances are the seventeenth doughnut eaten will create negative utility and unhappiness in addition to extra cost. The second doughnut might 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 be gaining utility from extra donuts.

The price that any given customer is willing to pay for an extra doughnut will decrease as they consumer more donuts. Shops are often aware of this fact, and will offer extra donuts for decreasing prices, lowering the marginal cost to meet the marginal benefit that the customers will receive from extra 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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