Economists and analysts use marginal revenue and marginal benefits to determine how much of a product a company should make to maximize its profits. Marginal revenue is the producer's side of the equation. It measures how much money a producer takes in based on the cost of producing an item. Marginal benefit is the maximum amount a consumer is willing to pay for the item, minus the cost of producing it.
Marginal revenue is the difference between the income the business takes in and the costs of producing that revenue. Conversely, marginal benefit is a customer-focused measure. It is the benefit to a customer of having a product, minus the cost of paying for the product. Marginal benefit is harder to quantify because the benefit to the customer is subjective.
Marginal revenue has a greater effect on monopolies than on competitive businesses. A monopoly has no competition, thus the laws of supply and demand work perfectly for a monopoly. If a monopoly produces more of a good, therefore, it must lower prices to sell all of the goods. Therefore, marginal revenue falls as the monopoly produces more of the good. Marginal benefit also falls as the monopoly produces more, because each unit becomes more expensive to produce as it produces less revenue.
Marginal benefit is a measure of customer demand, as it is the price customers are willing to pay to acquire a product. If the marginal benefit outweighs the marginal costs, or the producer's costs of making the unit, the producer will see an increase in marginal revenue. If the marginal benefit is less than the marginal costs, the producer will lose marginal revenue.
If the marginal revenue and the marginal cost are equal, a monopoly will maximize its profits. This situation results in a lower marginal benefit to consumers. This is because the monopoly has to produce fewer units to generate revenue equal to costs, than it does to create the maximum marginal benefit. For marginal benefits to be maximized, the marginal revenue must be slightly less than the marginal costs.
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