Marginal Benefit

Economics focuses on decisions at the margin: not whether to have something at all, but whether to have a little more or a little less. Marginal benefit measures the extra value of that next unit.

For example, if you are thirsty, the first glass of water gives a large benefit. The second gives less, and by the fourth or fifth, the extra benefit is very small. The marginal benefit of each additional glass falls.

Marginal benefit is compared with marginal cost, the extra cost of that next unit. A rational decision-maker keeps going as long as the marginal benefit is greater than the marginal cost and stops when they are equal.

A business might ask whether to stay open one more hour. If the extra sales from that hour, the marginal benefit, are 400 and the extra wages and energy cost 300, staying open makes sense. If the extra sales are only 250, it does not.

Thinking at the margin helps people and businesses avoid both doing too little of something valuable and too much of something whose extra benefit no longer justifies its cost.