MARGINAL

BENEFIT
LEARNING OBJECTIVES
 To understand the following:
 The concept of marginal benefit
 The law of diminishing returns to marginal benefit
 The relationship between the marginal benefit curve and the demand curve
 THE LAW OF DIMINISHING RETURNS
 We buy and consume goods and services because we receive benefit/satisfaction/utility when
we consume them.
 THE LAW OF DIMISHING RETURNS:
 As we continue to consume a good we add to our total benefit.
 On each additional unit of the good consumed the consumer gains an additional benefit.
 BUT the additional benefit gained from the consumption of the next unit is less than the
additional benefit gained from the consumption of the previous unit consumed.
 As we continue to consume the good total benefit increases BUT at a diminishing rate.
 This is happens because of THE LAW OF DIMINISHING MARGINAL BENEFIT.
 DEFINITION OF MARGINAL BENEFIT
 Marginal benefit (MB) is the increase in total benefit gained from the
consumption of the next unit
 It is calculated using this formula:
 The change in total benefit / The change in the quantity of the good consumed
 Consumption of the next unit will add to total benefit
 If we buy and then consume one more unit there will be an increase in total
benefit
 Therefore MB = Change in total benefit / 1
 MB can be defined as the extra benefit gained from the consumption of the
next unit
 THE MARGINAL BENEFIT CURVE
 Quantity Total Benefit Marginal benefit
 0 0 0
 1 10 10
 2 18 8
 3 24 6
 4 28 4
 5 30 2

Draw a diagram illustrating the information in the marginal benefit schedule.

Measure marginal benefit on the vertical axis and quantity consumed on the horizontal axis.
Note that as the quantity consumed increases marginal benefit falls. Also note that as quantity consumed increases total benefit increases but it
increases at a diminishing rate.
 As quantity consumed increases marginal benefit falls

 There is an inverse/negative relationship between quantity consumed and marginal benefit

 Therefore the marginal benefit curve slopes downwards

Calculation of MB = change in total benefit / change in quantity consumed

E.g. Consumption rises from 3 units to 4, a change of 1. Total benefit rises from 24 to 28, a change of 4
MB = 4/1 = 4
 EXPLAINING THE MARGINAL BENEFIT CURVE
 MB is measured on the vertical axis and quantity consumed is measured on
the horizontal axis
 As consumption increases total benefit increases BUT at a diminishing rate
because of the law of diminishing returns
 Therefore as quantity consumed increases marginal benefit falls
 There is an inverse/negative relationship between quantity consumed and
marginal benefit
 Therefore the marginal benefit curve slopes downwards
 MARGINAL BENEFIT AND PRICE
 Price can be defined in a number of ways

 In this case we can view price as the monetary value placed on the additional benefit gained from the consumption of the next unit.

 Price is a reflection of the value consumers in the market place on the benefit gained from the consumption of the marginal or next unit (marginal benefit)

 As quantity consumed rises marginal benefit falls

 Therefore the price (the monetary value consumers place on the extra benefit gained) also falls as quantity consumed increases.

 Therefore the marginal benefit curve is also the demand curve because as consumption increases price falls
HOMEWORK
 Explain why there is a negative/inverse relationship between marginal benefit and quantity
consumed. (10)

 Print out the power point and take notes

 Keep your work in your Economics folder