Marginal benefit is all about the individuals, it might represent

extra gain or value you get from doing satisfaction or utility gained from
something one more time. consuming a good or service.
● Examples:
Marginal cost is the additional cost ○ A company’s total revenue
incurred from producing one more unit of a from selling 100 units of a
good or service. product.
○ The increase in satisfaction
Downward Sloping Marginal Benefit or utility from consuming a
Curve = The more you consume, the less product or service.
you benefit from each extra unit.
2. Total Costs:
Upward Sloping Marginal Cost Curve =
The more you produce, the more it costs to ● These are the expenses or
make each extra unit. resources required to achieve those
benefits. Costs can include direct
Marginal Benefit ≥ Marginal Cost expenses like materials and labor,
as well as indirect costs like
Decision-Making: overhead or opportunity costs (the
benefits you forgo from choosing
● If MB > MC: It’s beneficial to one option over another).
increase production or consumption ● Examples:
because the additional benefit ○ A company's costs for
outweighs the additional cost. producing 100 units
● If MB = MC: This is the optimal (including raw materials,
point. You have maximized net labor, machinery costs).
benefits, and it’s the best level of ○ The cost in time, money, or
production or consumption. other resources that went
● If MB < MC: It’s not worth it to into creating or consuming
produce or consume more because something.
the additional cost exceeds the
benefit. In this case, the 3. Calculating Net Benefits:
decision-maker should reduce
production or consumption. You calculate net benefits by taking the total
benefits and subtracting the total costs. If
The formula is: the result is positive, you have a net gain. If
it’s negative, it means the costs exceeded
Net Benefits=Total Benefits−Total Cost
the benefits, resulting in a net loss.

1. Total Benefits: Net Benefits=Revenue (or

Benefits)−Production Costs (or
● These are the gains or value you Costs)\text{Net Benefits} = \text{Revenue
receive from an action or decision. (or Benefits)} - \text{Production Costs (or
For businesses, this could be the
revenue from selling products. For
Costs)}Net Benefits=Revenue (or Marginal Principle
Benefits)−Production Costs (or Costs)
The essence of the principle is that to
Example: maximize net benefits (the difference
between total benefits and total costs), a
Let’s say a company sells 100 gadgets at manager or decision-maker should adjust
$20 each. their control variable—like production,
investment, or pricing—until the marginal
● Total Benefits (Revenue) = 100
benefits (MB) equal the marginal costs
gadgets × $20 = $2,000.
(MC).
● Total Costs (cost to make 100
gadgets) = $1,200 (materials, labor,
Here’s a breakdown of the key
overhead).
ideas in your statement:
Net Benefits=2000−1200=800
1. Managerial Control Variable: This
So the net benefit (or profit) is $800. is something the manager can adjust
to affect the outcome. It could be the
Marginal Net Benefits: number of goods produced, the
number of workers hired, the amount
In marginal terms, you can also look at how of advertising spent, etc. The goal is
the net benefits change when you increase to adjust this variable to maximize
the production or consumption by one more net benefits.
unit: 2. Marginal Benefits (MB): The
additional benefits or returns from
● Marginal Net Benefit = Marginal increasing the control variable by
Benefit (extra benefit from one more one more unit (for example, the
unit) - Marginal Cost (extra cost extra revenue from producing one
from one more unit). more product).
3. Marginal Costs (MC): The
To maximize total net benefits, you keep additional costs incurred from
adjusting production or consumption until increasing the control variable by
marginal net benefits = 0, which happens one more unit (for example, the cost
when marginal benefits equal marginal of materials, labor, etc., to produce
costs. one more product).
4. Maximizing Net Benefits:
Conclusion: ○ Net Benefits are calculated
as Total Benefits - Total
To get net benefits, calculate the total gains Costs. To maximize this, you
from an activity (revenue, value, or need to find the point where
satisfaction), subtract all associated costs the additional benefit of
(materials, labor, etc.), and the result tells adjusting the control variable
you the overall benefit or profit from the exactly matches the
decision. additional cost of doing so.
 ○ If MB > MC, the manager ● Imagine you manage a factory, and
should continue increasing your control variable is the number
the control variable because of products made per day.
the additional benefit still ○ As you produce more, your
outweighs the cost. marginal benefit is the extra
○ If MB < MC, the manager revenue from selling
should reduce the control additional products.
variable because the ○ Your marginal cost is the
additional cost is greater than extra expense of materials,
the benefit. labor, and machinery.
5. Optimal Decision Point: The ● You should keep increasing
optimal point is where marginal production as long as the revenue
benefits = marginal costs (MB = (MB) from selling more products is
MC). At this point: higher than the cost (MC) of making
○ The manager is getting the them. But once the extra cost of
most out of the resources making another product matches the
used, meaning they’ve extra revenue, you stop increasing
maximized the net benefit. production—that's where you've
○ Beyond this point, adjusting maximized your net benefit. If you
the control variable further keep producing beyond that, the
would reduce net benefits, extra costs would exceed the extra
because the costs of further revenue, and you’d lose money.
adjustments would outweigh
the benefits. In essence, the Marginal Principle helps
6. Marginal Net Benefits are Zero: managers and decision-makers find the
○ Marginal Net Benefits refer exact point where they can no longer
to the difference between improve outcomes by changing a variable
marginal benefits and because they’ve reached the optimal
marginal costs. balance of benefits and costs.
○ At the point where MB = MC,
marginal net benefits Continuous decisions relate to
become zero. This is where how firms make production or consumption
no further gains can be choices when the control variable (such as
achieved by increasing or the quantity of a product) can take on any
decreasing the control value, including fractional amounts.
variable.
○ In other words, this is the 1. Continuous Control Variable:
"sweet spot" where the
manager should stop making ● In contrast to discrete decisions
changes, as they’ve already (where you can only choose whole
maximized the value from units, like 1 gallon or 2 gallons),
their decisions. continuous decisions allow for more
flexibility. For example, a company
Practical Example: can produce 1.5 gallons of a
 beverage instead of just whole marginal benefit and marginal
numbers. cost, respectively:
○ Marginal Benefit (MB): The
2. Total Benefits and Total Costs: slope of the total benefits
curve
● Total Benefits (B(Q)): This curve (dBdQ\frac{dB}{dQ}dQdB​).
represents the cumulative ○ Marginal Cost (MC): The
satisfaction or revenue obtained slope of the total costs curve
from producing or consuming (dCdQ\frac{dC}{dQ}dQdC​).
different levels of quantity QQQ.
● Total Costs (C(Q)): This curve 6. Equality of Marginal Benefit and
represents the cumulative costs Marginal Cost:
associated with producing or
consuming different levels of ● When net benefits are maximized,
quantity QQQ. the slopes of the total benefits and
total costs curves are equal, which
3. Net Benefits: translates to:

● Net Benefits (NB) are calculated as: MB=MC

Net Benefits=B(Q)−C(Q) This relationship signifies that the

additional benefit derived from
● The net benefits curve represents producing or consuming one more
the vertical difference between the unit is equal to the additional cost
total benefits and total costs curves incurred. It is at this point that the
in a graphical representation. most efficient allocation of resources
occurs.
4. Maximizing Net Benefits:
Summary:
● Maximization Point: Net benefits
are maximized at the point where ● In continuous decision-making, firms
the gap between the total benefits can produce or consume in
curve and the total costs curve is the fractional units. The principles
largest. This indicates the most remain the same: maximize net
efficient level of production or benefits by finding the level of
consumption where overall production or consumption where
satisfaction is maximized relative to marginal benefit equals marginal
costs. cost. This approach ensures that
resources are used efficiently,
5. Marginal Benefit and Marginal leading to optimal outcomes for the
Cost: firm.

● The slopes of the total benefits and

total costs curves represent
 ○ The basic rule is
Incremental revenues - The additional straightforward: if
revenues that stem from a yes-or-no incremental revenues
decision. exceed incremental costs,
the project is financially
Incremental costs - The additional viable and should be
costs that stem from a yes-or-no accepted.
decision. ○ In this case:
4. Incremental Revenues−Incremental
Incremental Decisions Costs=183,200−165,000=18,200\tex
t{Incremental Revenues} -
In decision-making, especially for \text{Incremental Costs} = 183,200 -
managers, incremental decisions focus on 165,000 = 18,200Incremental
evaluating whether to proceed with a project Revenues−Incremental
or investment based solely on the additional Costs=183,200−165,000=18,200
revenues and costs associated with that Since the result is positive, the
decision. This approach utilizes marginal project adds $18,200 to the
analysis to determine the feasibility and company’s bottom line, justifying a
profitability of a proposal. "thumbs up."

Key Concepts: Example Illustration:

1. Incremental Revenues: Project Proposal:

○ These are the additional
revenues generated ● Drilling Project: Decision on
specifically from adopting a whether to drill for crude oil.
new project or decision.
Financials:
○ In your example, if Slick
Drilling Inc. decides to drill for ● Incremental Revenues: $183,200
crude oil, the incremental (additional revenue from drilling)
revenues from this project ● Incremental Costs: $165,000
amount to $183,200. (additional costs for equipment and
2. Incremental Costs: labor)
○ These are the additional
costs incurred as a result of Decision:
adopting the project.
○ For the drilling project, the ● Since $183,200 (incremental
incremental costs include revenues) > $165,000 (incremental
$90,000 for drill augers and costs), the manager should proceed
$75,000 for additional with the drilling project.
temporary workers, totaling
$165,000. Further Example:
3. Decision Criterion:
Consider the scenario where you have a example, if the price of jeans drops from
control variable (e.g., production levels): $30 to $22.50, consumers will buy more
jeans, resulting in a movement from one
● First Unit: Adds significant benefits, point to another on the demand curve. This
with MB > MC. is explained by the law of demand, which
● Second Unit: Starts to add more to states that as price decreases, the quantity
costs than benefits, meaning MC > demanded increases, and vice versa.
MB.
Change in Demand (Demand Shifters)
Decision Implications: Demand shifters refer to factors other than
the price of the good that can influence the
● You would continue increasing
entire demand curve, causing it to shift
production until the marginal benefit
either rightward (increase in demand) or
of the last unit produced equals the
leftward (decrease in demand). These
marginal cost. If the second unit's
factors include:
marginal cost exceeds the marginal
benefit, you would stop increasing
Consumer Income: As income rises,
production to avoid diminishing
demand for normal goods increases (shifts
returns.
right), while demand for inferior goods may
decrease (shifts left).
Conclusion: Prices of Related Goods: The demand for
a good can change based on the price of
Incremental analysis is a crucial tool for
substitutes (if the price of a substitute
managers when evaluating specific projects
increases, demand increases) or
or proposals. By focusing on the additional
complements (if the price of a complement
revenues and costs directly associated with
increases, demand decreases).
the decision, managers can make informed
Advertising and Consumer Preferences:
choices that enhance profitability and align
Effective advertising or changes in
with the company's financial goals.
consumer tastes can increase demand.
Population: A growing population leads to
GROUP 1 LESSON greater demand for various goods.
Consumer Expectations: If consumers
market demand curve expect future prices to rise, they may
increase current demand, shifting the
A curve indicating the total quantity of a demand curve to the right.
good all consumers are willing and able to Thus, a change in quantity demanded
purchase at each possible price, holding the results from price changes of the good itself,
prices of related goods, income, advertising, while a change in demand arises from other
and other variables constant. economic variables, leading to a shift in the
entire demand curve.
Change in Quantity Demanded
This refers to the movement along a given
demand curve, which occurs when there is
a change in the price of the good itself,
assuming other factors remain constant. For
Here's a breakdown of the key concepts: perceptions, which also
increases demand.
1. Income and Demand: 4. Population Changes:
○ Normal Goods: An increase ○ An increase in population
in consumer income shifts typically shifts the demand
the demand curve for these curve to the right, as more
goods to the right (e.g., people are interested in
designer jeans, steak). A purchasing goods. Changes
decrease in income shifts the in population composition
curve to the left. (e.g., more middle-aged
○ Inferior Goods: An increase consumers) can also affect
in income decreases the the types of goods in
demand for these goods, demand.
shifting the demand curve to 5. Consumer Expectations:
the left (e.g., bus travel, ○ If consumers expect higher
generic jeans), while a drop future prices, they may
in income increases demand. purchase goods now,
2. Prices of Related Goods: increasing current demand.
○ Substitutes: When the price This is common for durable
of one good rises, the goods (e.g., cars) and
demand for its substitute stockpiling behavior.
increases (e.g., Coke and 6. Other Factors:
Pepsi). This is shown as a ○ Variables like health scares
shift in the demand curve to or changes in life
the right for the substitute circumstances (e.g., birth of
good. a baby) can shift demand.
○ Complements: If the price of For instance, health
a good rises, the demand for concerns may decrease
its complement decreases demand for cigarettes.
(e.g., beer and pretzels).
Lower prices of complements The Demand Function:
increase demand for the
other product. ● This is a formal way to represent
3. Advertising and Consumer how much of a good is purchased
Tastes: based on its price, the prices of
○ Informative Advertising: related goods, income, and other
Provides information about a variables.
product, increasing ● A linear demand function shows a
consumer awareness and relationship where demand is
shifting the demand curve to influenced by these factors in a
the right. straightforward manner. For
○ Persuasive Advertising: example:
Alters consumer tastes or
 ○ An increase in the price of total out-of-pocket expense
good X leads to a decrease for 2 liters is $6.
in its demand. ○ Consumer Surplus: The
○ The relationship between difference between the total
goods (substitutes or value and the actual amount
complements) and income paid ($8 - $6 = $2 in this
(normal or inferior) affects the example) represents the
signs and magnitude of the consumer surplus. This extra
coefficients in the demand value reflects the consumer's
function. gain from purchasing the
good at a lower price than
This analysis highlights the interplay they would have been willing
between income, prices of related goods, to pay.
consumer preferences, and external factors 2. Graphical Representation:
in shaping demand. ○ Consumer surplus is
depicted as the area
The concept of consumer surplus between the demand curve
illustrates the additional value consumers and the price line, above the
receive from a good beyond what they price and below the demand
actually pay for it. Here's a summary of the curve. For example, if the
key points from the text: price is $2 per unit, a
consumer purchasing 3 liters
1. Consumer Surplus and Demand:
will have a consumer surplus
○ The demand curve reflects
of $4.50, calculated as the
the maximum price a
area of a triangle:
consumer is willing to pay for
○ Consumer
each additional unit of a
Surplus=0.5×base×height=0.
good. As consumption
5×3×(5−2)=4.50
increases, the willingness to
pay decreases. Practical Implications for Managers:
○ Total Value of
Consumption: The total ○Multiunit Pricing: Managers
benefit or value that a can use consumer surplus to
consumer receives is determine how much
represented by the area consumers would be willing
under the demand curve for to pay for bundled goods. For
the total quantity purchased. instance, if the total value of
For instance, in the example 3 liters of a beverage is
of consuming 2 liters of $10.50, the company could
water, the total value is $8. charge this price for a 3-liter
○ Actual Price Paid: bottle and capture the entire
Consumers typically pay a consumer surplus.
single price for all units 3. Revenue and Consumer Surplus
consumed. For example, if Example:
the price is $3 per liter, the
 ○ In the Happy Beverage represent the behavior of producers and
Company example, at a consumers, respectively, but they operate in
price of $2 per liter, a opposite directions. Let’s break down their
consumer buys 3 liters, differences:
yielding $6 in revenue for the
firm and $4.50 in consumer 1. Law of Demand:
surplus for the consumer.
The maximum a consumer ● Definition: The law of demand
would pay for 3 liters is states that, all else being equal,
$10.50 (including both the when the price of a good
price paid and the surplus decreases, the quantity
value). demanded increases; and when
4. Supply Curve: the price of a good increases, the
○ Market Supply Curve: quantity demanded decreases.
Reflects the total quantity ● Reasoning: Consumers are
producers are willing to generally willing to buy more of a
supply at various prices, good when it’s cheaper, and less of
holding other factors it when it becomes more expensive.
constant. ● Demand Curve: It slopes
○ The law of supply states downward from left to right because
that as prices rise, the as price falls, the quantity demanded
quantity supplied increases, rises.
and as prices fall, the ● Example: If the price of coffee drops
quantity supplied decreases. from $5 to $3 per cup, more people
○ Supply Shifters: Factors will likely buy coffee. Conversely, if
such as input prices, the price rises to $7 per cup, fewer
technology, the number of people will buy it.
firms, taxes, and producer
expectations shift the supply 2. Law of Supply:
curve. A rightward shift
indicates an increase in ● Definition: The law of supply states
supply, while a leftward shift that, all else being equal, when the
represents a decrease in price of a good increases, the
supply. quantity supplied increases; and
when the price decreases, the
Understanding these concepts is essential quantity supplied decreases.
for firms in setting optimal prices and ● Reasoning: Producers are more
strategies to maximize revenue while motivated to produce and sell more
considering consumer behavior and market of a good when prices are high, as it
dynamics. increases their potential revenue
and profit. Conversely, when prices
The law of supply and the law of demand are lower, they produce less, as it
are two fundamental concepts in may not be profitable.
economics, governing how prices and
quantities are determined in markets. They
 ● Supply Curve: It slopes upward rise, it becomes more
from left to right because as the profitable for them to produce
price rises, producers are willing to and sell more goods.
supply more of the good.
● Example: If the price of a gallon of 4. Market Equilibrium:
milk increases from $2 to $4, dairy
farmers are likely to supply more ● Interaction: The law of supply and
milk to take advantage of the higher the law of demand interact to
prices. determine the market price and
quantity sold in a market.
3. Key Differences: ● Equilibrium Price: This is the price
at which the quantity demanded by
● Direction of Relationship: consumers equals the quantity
○ Law of Demand: There is an supplied by producers. At this point,
inverse relationship between the market is in balance—no
price and quantity demanded surplus or shortage.
(as price increases, demand ● Surplus and Shortage:
decreases). ○ Surplus: If the price is above
○ Law of Supply: There is a the equilibrium price, quantity
direct relationship between supplied exceeds quantity
price and quantity supplied demanded, leading to a
(as price increases, supply surplus. Producers will then
increases). lower prices to sell the
● Behavior of Participants: excess goods.
○ Demand: Focuses on ○ Shortage: If the price is
consumers’ behavior—how below the equilibrium price,
much of a good consumers quantity demanded exceeds
are willing to purchase at quantity supplied, leading to
different price levels. a shortage. Producers will
○ Supply: Focuses on raise prices, and demand will
producers’ behavior—how fall back to equilibrium.
much of a good producers
are willing to offer for sale at 5. Graphical Representation:
different price levels.
● Motivations: ● Demand Curve: Slopes downward
○ Demand: Consumers seek (price on the y-axis, quantity
to maximize their satisfaction demanded on the x-axis), reflecting
or utility from purchasing the inverse relationship between
goods and services. As price and demand.
prices fall, they can afford to ● Supply Curve: Slopes upward,
buy more and derive more showing the direct relationship
benefit. between price and supply.
○ Supply: Producers seek to
maximize profit. When prices
 ● Market Equilibrium: Where the A price ceiling is a government-imposed
supply and demand curves intersect limit on how high the price of a good or
is the equilibrium price and quantity. service can go. It is usually set below the
equilibrium price to make essential goods
6. Shifts in Supply and Demand: more affordable for consumers.

● Changes in factors other than price, ● Purpose: To protect consumers

such as income, tastes, input costs, from prices that are considered too
or technology, can shift the supply or high, particularly for necessities such
demand curve. as housing (rent control) or food.
○ Demand Curve Shift: Can ● Effect: A price ceiling often leads to
occur due to factors like a shortage because, at the
changes in income, artificially lower price, the quantity
consumer preferences, or the demanded exceeds the quantity
price of related goods supplied.
(substitutes or ● Example: If rent in a city is getting
complements). too high, a government might
○ Supply Curve Shift: Can impose a rent ceiling to make
occur due to changes in housing more affordable. However,
production costs, this can lead to fewer landlords
technological advancements, being willing to rent out apartments
or changes in the number of because the lower rent is not
producers in the market. profitable.

Graphical Impact:
Summary:
● Price ceiling set below equilibrium
● Law of Demand: Deals with
price creates a shortage, as
consumer behavior and how they
demand increases and supply
respond to price changes, showing
decreases.
an inverse relationship between
price and quantity demanded.
● Law of Supply: Focuses on
producer behavior and how they
2. Price Floor:
respond to price changes, showing a
direct relationship between price and A price floor is the opposite of a price
quantity supplied. ceiling. It is a minimum price set by the
government for a good or service, typically
In a market, these two forces interact to
above the equilibrium price, to ensure that
determine prices and quantities, ultimately
producers receive a minimum income.
finding a balance at the equilibrium point
where supply meets demand. ● Purpose: To protect producers or
workers by ensuring they receive a
1. Price Ceiling: fair price or wage, even if the market
would set it lower.
 ● Effect: A price floor often leads to a \times \text{Quantity} \times (\text{Maximum
surplus because, at the artificially Willingness to Pay} - \text{Price
higher price, the quantity supplied Paid})Consumer
exceeds the quantity demanded. Surplus=21​×Quantity×(Maximum
● Example: Minimum wage laws are a Willingness to Pay−Price Paid)
type of price floor. If the minimum
wage is set too high, it can lead to
unemployment because employers 4. Producer (Supplier) Surplus:
may not want to hire as many
workers at the higher wage. Producer surplus is the difference
between the price a producer receives for a
Graphical Impact: good and the minimum amount they are
willing to accept to produce that good.
● Price floor set above equilibrium
price creates a surplus, as supply ● Concept: It represents the extra
increases and demand decreases. benefit producers receive when they
sell a product for more than the
minimum price at which they would
have been willing to sell it.
3. Consumer Surplus: ● Graphically: It is the area above
the supply curve but below the
Consumer surplus is the difference market price.
between the maximum amount a consumer ● Example: If a producer is willing to
is willing to pay for a good and the actual sell a widget for $5 but the market
price they pay. price is $10, the producer surplus is
$5 per unit.
● Concept: It represents the extra
benefit consumers receive when Formula: Like consumer surplus, it can be
they pay less for a product than they calculated as the area of a triangle (if linear)
were willing to pay. using:
● Graphically: It is the area below
the demand curve but above the Producer Surplus=12×Quantity×(Price
price consumers pay. Received−Minimum Acceptable
● Example: If a consumer is willing to Price)\text{Producer Surplus} = \frac{1}{2}
pay $50 for a pair of shoes but finds \times \text{Quantity} \times (\text{Price
them on sale for $30, their consumer Received} - \text{Minimum Acceptable
surplus is $20. Price})Producer
Surplus=21​×Quantity×(Price
Formula: Consumer surplus can be Received−Minimum Acceptable Price)
calculated as the area of a triangle (if linear)
using:

Consumer Surplus=12×Quantity×(Maximum
Summary:
Willingness to Pay−Price
Paid)\text{Consumer Surplus} = \frac{1}{2}
 ● Price Ceiling: Maximum price set
below equilibrium; can cause
shortages (e.g., rent control).
● Price Floor: Minimum price set
above equilibrium; can cause
surpluses (e.g., minimum wage).
● Consumer Surplus: Benefit
consumers get from paying a price
lower than they were willing to pay.
● Producer Surplus: Benefit
producers get from selling at a price
higher than the minimum they would
have accepted.

Both consumer and producer surplus

together represent the total economic
welfare or total surplus in a market,
indicating the efficiency and overall benefit
created by the interaction of supply and
demand.