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What is Marginal Benefit?
We can define Marginal Benefit as the maximum amount a buyer can pay for an extra unit of product purchased after the first unit. Consumers normally tend to compare the marginal cost of purchasing an extra unit with the marginal benefit derived from purchasing it. In other words, we can also define Marginal Benefit as the satisfaction that a consumer gets after purchasing an extra unit. It is also known as marginal utility.
How Do Companies Use Marginal Benefit?
Marginal Benefit is a valuable tool that is heavily used in business market research and advertising. Companies evaluate marginal benefits and use that information to fix the pricing of their products and services.
By analyzing Marginal Benefit, companies also get a clue regarding the additional expenses they would incur for selling additional units.
Falling Marginal Benefits
Marginal benefit normally decreases with the rate of consumption, because the consumers tend to draw less satisfaction by consuming an extra unit of the same product. Marginal benefit is at its peak during the first consumption of a product and it reduces gradually with every incremental consumption.
Let's try to understand it with an example. A customer may spend 1000 rupees for a bottle of perfume. In this case, the marginal benefit is 1000 rupees. However, the same customer may not be willing to spend another 1000 rupees for a second unit of the same bottle of perfume. The customer may agree to buy a second unit for 800 rupees. Therefore, the marginal benefit has reduced from 1000 rupees for the first unit to 800 rupees for the second unit. Companies use the concept of marginal benefit to find out why customers pay a specific price for a certain product.
Types of Marginal Benefits
There are three different types Marginal Benefits
Positive Marginal Benefit - If a consumer gets more satisfaction by consuming an extra unit of a product, then it is called Positive Marginal Benefit. For example, if one loves to have coffee after dinner, then a second cup of coffee may bring more satisfaction.
Negative Marginal Benefit - If the consumption of an additional unit brings with it some negative consequence, then the Marginal Benefit is negative. For example, if a consumer cannot stop eating ice-creams (even by paying the same price for the additional units), then it may cause health issues.
Zero Marginal Benefit - If the consumption of an additional unit does not bring extra satisfaction or any negative consequence, then the Marginal Benefit is Zero. For example, if a consumer feels that consuming an additional slice of cake (after already having four of them) wouldn't bring any additional happiness, then the marginal benefit of consuming an extra cake is zero.
How to Maximize Marginal Benefits
The most common way to maximize marginal benefits is to buy products with highest marginal benefit per unit. Companies use this to their advantage by pricing their products such that consumers would not hesitate to spend their money to purchase more units. For example, online shopping websites sell a two to three T-shirts as a combo product such that the cost per unit becomes low, which attracts consumers and influences their purchasing behavior.
Law of Diminishing Marginal Benefits
As per the law of diminishing marginal, the level of satisfaction derived will gradually decline with every incremental purchase of a product. Most companies use the concept of Diminishing Marginal Benefits in their pricing policy. They try to set the pricing of their products such that additional units cost lower than the price of the first unit. It is necessary to attract the consumers to purchase additional units of a product.
Marginal Benefit Vs Marginal Cost
While Marginal Benefit is the maximum amount a buyer can pay for an extra unit of product purchased after the first unit, Marginal Cost is the small change in total production cost that the Producer gets from making one additional unit. Marginal Cost measures how the cost of a product changes when the producer manufactures an additional unit of the same product.
Marginal Cost of Production - Example
Let's take an example to understand the concept of Marginal Cost of Production.
Suppose a Publishing company incurs a cost of 50 rupees in printing a book. However, there are fixed costs such as setting up the Press, logistic and warehousing costs, etc. Let's assume the fixed cost is 50,000 rupees.
Cost of printing 1000 books = 50000 + (1000 ☓ 50) = 100,000 rupees Cost per unit = 100,000 ÷ 1000 = 100 rupees Cost of printing 1001 books = 50000 + (1001 ☓ 50) = 100,050 rupees Cost per unit = 100,050 ÷ 1001 = 99.95 rupees
Notice how the cost per unit reduced from 100 rupees to 99.95 rupees when the Producer prints an additional copy.
Companies have to consider the effect of both Marginal Benefit as well as Marginal Cost in their pricing strategy.
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