

Local


US & World


Sports


Business


Entertainment


Life


Deals


Jobs


Cars


Real Estate


HoustonChronicle.com

 Local

 US & World

 Sports

 Business

 A&E
 Life

 Jobs

 Cars

 Real Estate

What Is the Difference Between Marginal Benefits & Marginal

Cost?
 Small Business

 Money & Debt

 Market Prices

ByCam Merritt


 


 


 


 


 


When businesses are planning how much to produce, they must pay close attention to
marginal costs and marginal benefits -- the incremental changes in costs and benefits
that result from an increase in production. Customers, too, make decisions based on
incremental benefits and costs. Understanding the differences and interplay between
these concepts will help you make smarter production decisions.

Marginal Benefit

Marginal benefit is the gain you receive for doing anything "one more time." If you
owned, say, a cake shop, and you could sell an unlimited number of cakes for $15
apiece, then your marginal benefit for each additional cake you produced would be
$15. In the real world, though, you'll always reach a limit on how much you can sell at a
given price. If your market is saturated, you might have to drop your price to sell
another cake. So your marginal benefit for the next cake might be $9. For a business,
marginal benefit is typically measured in terms of revenue -- how much you can get for
the next unit you produce.

Marginal cost is the additional cost you incur to produce one more unit. In the example, it's
what it costs to make one more cake. Typically, marginal costs start out high and decline as
you increase production, as overhead gets spread out over more units and you put unused
capacity to work at relatively low cost. At some point, though, marginal cost bottoms out: You
reach full capacity, and if you want to increase production, you'll have to buy more ovens and
pans, hire more workers, keep longer hours and so on. All that adds costs, so your marginal
cost begins to rise. Now marginal cost is going up while marginal revenue is declining, for
reasons already discussed, meaning you're making less and less profit on each cake.