In economics, the marginal benefit is defined as the increased satisfaction or benefit gained by consuming an item; while marginal utility is the change in utility from a decrease in the consumption of the item. The former refers to the reduction of total utility and the latter refers to the increase in utility generated by the decreased consumption.
Marginal benefit is a concept that has its origin in economics. It is generally associated with theories of demand curves and with price theory, and with the general theory of money. The concept of marginal benefit was developed by the Swedish economist Gunnar Myrdal, who in his Theory of Distribution presented the idea that a certain quantity of any commodity produced would always be greater than its production.
For different consumers, the marginal benefit of a commodity will differ; this is because some consumers, whose expenditure is very high, will have a lower total utility and, hence, a lower level of satisfaction than other consumers. Hence, if certain commodity increases in demand, so does the level of satisfaction. In other words, the demand curve for a commodity will increase if it is produced at a faster rate. This is the concept of marginal cost.
It can also be defined as the difference between marginal cost and marginal utility. For instance, if a firm produces a hundred widgets, but its total expenditure is only eighty-one widgets, then its marginal utility is forty-one widgets, whereas that of its competitors is forty-one and a half. Thus, the higher the production rate, the higher the level of satisfaction expected by the consumers. Conversely, if the firms produce a lower quantity of goods, they will have higher levels of satisfaction, but the total expenditure of producing those goods will be much more.
There are various economic theories on the topic of marginal benefit. Some of them include Ricardo’s theory, which explains the fact that the value of commodities decreases with a rise in production rates and the value of money increases with a decline in production rates. Others such as Keynesian theory, which maintains that the increase or decrease of a firm’s expenditure is equal to the increase or decrease in the national income of the firm.
However, when it comes to the real world, marginal cost is what is usually considered. As we have seen above, there are two types of cost – the marginal cost of production, which are based on production costs, and the marginal cost of consumption, which are based on total expenditure. It is this marginal cost that determines the satisfaction expected by the consumers. Thus, in a situation where the prices of the items are fixed, it is difficult to estimate the marginal cost of production, and, but the marginal cost of consumption is easier.
With respect to the real world, marginal cost is based on the amount of capital required to produce the commodity and, hence, the cost of production is the price minus the marginal cost of production. Marginal benefit, however, is based on the price and, hence, the value of the product, and the greater the value of the product, the greater the marginal benefit. Economists suggest that this difference between marginal cost and marginal benefit is equal to the value of the commodity and, therefore, the satisfaction expected by the consumers.
Economists also suggest that marginal utilities are also affected by changes in the level of production. Thus, for example, if the cost of production is higher, then the price per unit will also increase and, thus, the consumers’ satisfaction will be higher. This means that the marginal benefit of the product should be greater and the consumers should be satisfied more.