An Easy Explanation of Marginal Benefits

The concept of the marginal benefit of an action or product is a favorite of introductory-level macroeconomics teachers. Economics textbooks describe marginal benefits as the utility of the marginal use, but what does that really mean? Below, I'll try to demystify the idea behind the a marginal benefit using a simple example about...potato chips.

A Bag of Potato Chips?

Imagine you have a bag of potato chips (or some other food that you enjoy eating). With each chip you eat, you are asked to rate how happy that individual chip makes you feel-say, on a scale from -5 to +5, where any positive number indicates a increase in your happiness, a score of zero represents no change in your happiness, and negative numbers indicate that you are actually becoming less happy to eat that chip.

If you're hungry and in the mood for potato chips, the first chip you eat will likely be very satisfying: say, a score of +4. The next handful of chips will also be satisfying: maybe from +2 to +3. However, as you go for the next handful of chips, maybe you start to wonder if you're really hungry, or if you're blowing your diet by pigging out on potato chips. However, you're still happy from eating the chips, so you give that next handful a score of +1.

Eventually, you'll reach a place where you gain no additional happiness by eating one more chip. At this point, your marginal benefit and marginal cost are equal. If you can picture a standard supply-and-demand chart, this is the equilibrium point between marginal costs and benefits, which behave in the same way as supply and demand. Since a marginal decision will only involve the next chip you'll eat, you'll weigh the marginal cost against the marginal benefit, and decide that the next chip isn't worth it. You'll put the bag away.

Even though this example seems simple, it's actually a pretty good way to explain marginal benefits. The marginal benefit of anything is the benefit (or cost) of consuming one more of that item. The net marginal benefit is the marginal benefit minus the marginal cost. When the net marginal benefit reaches zero, you've reached equilibrium. Why eat that next chip if you're already full and it will provide no more benefits? When solving problems about marginal benefits, look for the spot where the net marginal benefit equals zero. At this point, it's not rational to consume any more of the item. It's really that easy!