Proper strategizing is essential for developing any business. That’s why you need to learn how to calculate marginal benefit. If you don’t know industry terminologies, you won’t be able to run your business perfectly in this modern world.
Using marginal benefit, you will know how a customer is going to perceive your products or services and the amount of product you could sell to them. You will also learn about the utility the customer is receiving and the profit you will be able to make.
In this article, you will learn what is marginal benefit, how you can calculate it, and other information related to it. You will be able to use this theory effectively in your business after you read the article carefully.
Marginal Benefit Formula
Marginal benefit can be calculated using the number of units a consumer has consumed and the benefit the consumer has received. The changes of these two variables need to be divided using the marginal benefit formula to calculate the marginal benefit.
Marginal Benefit = Change in the total benefit / Change in the number of units consumed
How to Calculate Marginal Benefit?
Basically, you need two things to calculate the marginal benefit. First of all, change in the total benefit. You can calculate this by deducting the benefit of current consumption from the benefit of previous consumption. When a consumer consumes a product repeatedly, the utility of the product gets reduced on every consumption.
Therefore, the utility from the last amount of product must be smaller than the previous amount. Subtract the previous utility from the total utility and you will get the change in total benefit. For example, if a consumer consumes a banana, he/she gets 10 amounts of utility. If he/she takes another banana, the total amount of utility will be 18.
Now the change in total benefit is 8 (18 – 10) because that’s the number of utility changes after consuming the last unit of product. Take note of this, as you will be using it to calculate the marginal benefit.
Calculating the change in the number of units is easier in this case. You need to subtract the previous amount of consumption from the total number of units consumed for this. As the consumer took 2 bananas in total, you can deduct the previous amount from this, which is 1. Therefore, the change in the number of units consumed is 1 (2 – 1).
Hence, you can divide the results you got from the previous calculations and find the marginal benefit. In this case, the marginal benefit is 8/1 = 8. Pretty easy, right? Remember, it won’t be easy in real-world calculations as you will be dealing with bigger numbers and tables.
Marginal Benefit Definition
Marginal benefit is nothing but the amount a consumer will want to pay for an additional product or service. Also, you can say that it is the amount of utility the customer is receiving after consuming an additional unit of product. Customers will not want to pay more than the utility they are receiving.
The marginal benefit gradually decreases after the consumption of each product and can eventually be negative. The marginal benefit for the manufacturers is called marginal revenue. Companies try to provide the marginal benefit at the best price. If the consumer wants to pay higher than the price set by the producers, it’s called consumer surplus.
Examples of Calculating Marginal Benefit
An example will help you understand the calculation of marginal benefit. Check the following table below before starting.
In this table, you can see the number of units a consumer is consuming, which is the slices of pizza. You can also see the total benefit and the marginal benefit. I will explain how I have calculated the marginal benefit in a moment.
When a consumer takes the first slice of pizza, he/she receives 50 amounts of benefits, which is the highest marginal benefit here. After taking the second slice of pizza, you will expect the total benefit to become 100. As 50 was for one slice of pizza, two slices should provide 100 amounts of utility.
But this time, the utility becomes 85 in total. That’s because the marginal benefit has decreased instead of being static. You can apply the formula of marginal benefit in the cell of C3 to find the marginal benefit. That’s the amount a consumer will be ready to pay for that amount of pizza.
The total amount of product is A3 and the previous amount is A2. Similarly, the total amount of benefit is B3 and the previous amount is B2. If you apply the formula of marginal benefit in excel, it should be “= (B3 – B2) / (A3 – A2)” (without quotation).
You can see that the result is 35, which is the marginal benefit for the second and the first slice of the pizza. Drag the cell C3 down to C6 for checking the marginal benefit of all slices. The marginal benefit has become negative at last, but that’s expected. If a consumer takes the same product again and again, the marginal benefit will tend to decrease at negative.
Is Marginal Benefit the Same as Marginal Utility?
The marginal benefit is almost the same as the marginal utility. You should not find any differences between marginal benefit and marginal utility in general. Even the calculation is the same, but there is a little difference.
The marginal utility is for the utility a consumer receives after having the last amount of product. But the marginal benefit is what the consumer wants to pay for the least amount of product. In general, the customer will not want to pay more for a product than the amount of utility he/she is receiving.
That’s why people often get confused between marginal benefit and marginal utility. Even I have shown the example and the formula as if it’s the marginal utility. But you need to remember that the market price is set by the market leaders, not the consumers. Even if the consumer does not receive enough utility, he/she might have to pay more.
Can Marginal Benefit Change?
Yes, a marginal benefit can change and that’s how marginal benefit works. You can’t surely tell at which rate the marginal benefit will change or how much it will change. But it changes. As you know, the marginal benefit is often similar to marginal utility. As marginal utility decreases according to the law of diminishing marginal utility, marginal benefit follows that.
Consuming the same item again and again hardly adds value to the total benefit (or the utility). Take a real-world example for that. When you buy a product in bulk, do you pay the price of an individual product? No, no one does that. People tend to offer less when they buy a larger amount of product, and that’s why the marginal benefit changes.
The marginal benefit can be negative as after consuming a certain amount of product, a consumer will not want to take that product anymore. If you are a student of economics, you will see that the demand curves gradually get downward. That’s because the marginal benefit and the marginal utility decrease with each unit of product or service.
By now I’m sure that you have understood how to calculate marginal benefit. Learning marginal benefits is important for any business. It’s a great way to predict how much of your products or services you will be able to sell to your customers which is always important when planning out your business. Thanks for reading and best of luck with developing a successful business.