key term - Marginal Benefit

Definition

Marginal benefit is the additional satisfaction or value that a consumer derives from consuming one more unit of a good or service. It represents the change in total benefit as the consumption of a product increases by one unit, holding all other factors constant.

5 Must Know Facts For Your Next Test

1. In a perfectly competitive market, the equilibrium price is determined by the intersection of the market demand curve (which reflects the marginal benefit) and the market supply curve (which reflects the marginal cost).
2. Consumers will continue to purchase a good up to the point where the marginal benefit equals the marginal cost, as this maximizes their overall satisfaction or total benefit.
3. The marginal benefit curve slopes downward due to the law of diminishing marginal utility, which states that as consumption increases, the additional satisfaction derived from each new unit decreases.
4. Allocative efficiency in a perfectly competitive market is achieved when the marginal benefit of the last unit consumed equals the marginal cost of producing that unit.
5. Deadweight loss occurs when the marginal benefit of a good or service is greater than the marginal cost, but the good is not produced or consumed due to market failure or government intervention.

Review Questions

• Explain how the concept of marginal benefit relates to the efficiency of perfectly competitive markets.
  • In a perfectly competitive market, the equilibrium price and quantity are determined by the intersection of the market demand curve, which reflects the marginal benefit, and the market supply curve, which reflects the marginal cost. Allocative efficiency is achieved when the marginal benefit of the last unit consumed equals the marginal cost of producing that unit, ensuring that resources are allocated to their highest-valued uses. Consumers will continue to purchase a good up to the point where their marginal benefit equals the marginal cost, maximizing their overall satisfaction or total benefit.
• Analyze the role of diminishing marginal benefit in the context of perfectly competitive markets.
  • The principle of diminishing marginal benefit states that as consumption of a good increases, the additional satisfaction or value derived from each new unit decreases. This means that the marginal benefit curve slopes downward, reflecting the fact that consumers are willing to pay less for each additional unit of the good. In a perfectly competitive market, this downward-sloping marginal benefit curve, combined with the upward-sloping marginal cost curve, determines the equilibrium price and quantity where the market achieves allocative efficiency.
• Evaluate how the concept of marginal benefit can be used to identify and explain instances of market failure or inefficiency in perfectly competitive markets.
  • Deadweight loss occurs when the marginal benefit of a good or service is greater than the marginal cost, but the good is not produced or consumed due to market failure or government intervention. This represents a loss of potential social welfare, as resources are not being allocated to their highest-valued uses. By understanding the concept of marginal benefit and its relationship to marginal cost, economists can identify situations where the market is not achieving allocative efficiency, such as the imposition of price controls or the existence of externalities. Analyzing these market failures through the lens of marginal benefit can help policymakers develop interventions to improve overall economic efficiency.

Related terms

Total Benefit: The overall satisfaction or value a consumer receives from consuming a certain quantity of a good or service.

Diminishing Marginal Benefit: The principle that as consumption of a good increases, the marginal benefit from each additional unit consumed decreases.

Marginal Cost:

The additional cost incurred by producing one more unit of a good or service.