How to Calculate a Marginal Benefit

by Ron Price - Updated June 27, 2018
Business woman thinking account

The marginal benefit of any good or service is the additional satisfaction, or utility, a consumer receives from the consumption of one additional unit of a good or service. Marginal benefit is maximized at the highest price the consumer is willing to pay for that one additional unit. In most cases, marginal benefit declines as further consumption increases, under the Law of Diminishing Returns.

An Example of Marginal Benefit

As a manufacturer, marginal benefit is the amount over/under your market price at which you can sell one additional unit. Marginal benefit is expressed in the exchange unit used to acquire one additional unit of a good or service. Typically, this is currency, which in the U.S. is the dollar. Suppose that after eating one hot dog, you want to have another. How much benefit will you get from eating one more hot dog? And, how much are you willing to pay for it, regardless of its actual price?

If you are willing to pay $5 for that one additional hot dog, then the additional benefit -- its marginal benefit -- is worth $5 to you. Because the measurement of benefit in this case is personal, the next person may have a different marginal benefit. If the actual price of the hot dog is $2 instead of $5, the difference between it and the price you are willing to pay for that one additional hot dog is a consumer surplus, which in this case is $3.

The same principle applies on the producer side as well. If you sell hot dogs for $2 regularly, but a shortage of hot dogs increases demand to the point that you can raise the price to $3, you are realizing a $1 marginal benefit. Of course, this could be offset by any increase in your marginal costs. Raising your price too much can lower profits by driving customers away, but pricing your product too low can also cut into your profits because as operating costs rise -- and they will rise -- you will have to spend a larger share of your profit on running the business. To set appropriate prices, research the market for your product. Find out what other businesses are charging for the same product and what consumers are willing to pay for it. An important part of market research is testing price points, which you can do through A/B testing and direct surveys with your target audience. You'll also need to determine your costs for sourcing, shipping and storing the product to determine your profit margin with your price point.

Calculate a Marginal Benefit

Calculating a marginal benefit is relatively simple. As discussed earlier, as a consumer, your marginal benefit is the amount you are willing to pay to consume one additional unit of a good or service, less the market price of one unit of that good or service.

About the Author

Ron Price, MBA, has extensive senior level experience in business, information technology, and education. Under his pen name Ron Gilster, Price has written over 40 books for several leading publishers on a topics ranging from business and finance to IT certifications to real estate.

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