Marginal and Total

(Costs and Benefits)

Why do marginal and total costs and benefits
matter?

• Supply and demand.

• Graphs

• Understanding decisions
 Contents

• Definitions of marginal and total benefit.

• The relationship between marginal and total benefit.

• Marginal benefit and the demand curve.

• Marginal cost and the supply curve.

• Situations with decreasing marginal benefit and increasing marginal

cost.
Introducing marginal and
total benefit
 Think about chocolate bars and
answer the following questions.
• What is the most you would pay for your 1st chocolate bar?

• What is the most you would pay for your 2nd chocolate bar if you
already have 1 chocolate bar?

• What is the most you would pay for your 3rd chocolate bar if you
already have 2 chocolate bars?
 Language: marginal benefit
• What is the most you would pay for your 1st chocolate bar?
• This is the marginal benefit of the 1st bar.

• What is the most you would pay for your 2nd chocolate bar if
you already have 1 chocolate bar?
• This is the marginal benefit of the 2nd bar.

• What is the most you would pay for your 3rd chocolate bar if
you already have 2 chocolate bars?
• This is the marginal benefit of the 3rd bar.
 Economists generally assume
• More is better, i.e. marginal benefit is positive.

• Marginal benefit is decreasing.

• The more chocolate bars you have the less you enjoy the
next one.

• Do your numbers satisfy these conditions?

 Chocolate marginal
bars benefit
1 1.00
2 0.80
3 0.64
4 0.51

Is marginal benefit positive and decreasing here? yes

Finding total benefit from
marginal benefit
 Total benefit
• The total benefit of 1 chocolate bar is the most you will pay
for 1 chocolate bar

• The total benefit of 2 chocolate bars is the most you will pay
for 2 chocolate bars.

• The total benefit of 3 chocolate bars is the most you will pay
for 3 chocolate bars.
 Chocolate marginal Total
bars benefit benefit
1 1.00
2 0.80
3 0.64
4 0.51

Work with these numbers.

 Marginal and total benefit
• The total benefit of 1 chocolate bar is the same as the marginal
benefit = 1.00

• The total benefit of 2 chocolate bars is

MB bar 1 + MB bar 2 = 1.00 + 0.80 = 1.80

• The total benefit of 3 chocolate bars is

• MB bar 1 + MB bar 2 + MB bar 3 =
1.00 + 0.80 + 0.64 = 2.44
 Marginal and total benefit

The total benefit of n chocolate bars is

• MB bar 1 + MB bar 2 + ……. + MB bar (n – 1) + MB bar n
total benefit of n bars = SUM marginal benefit of 1, 2 …n bars

chocolate marginal total

bars benefit benefit
1 1.00 1.00 = 1.00
2 0.80 1.00 + 0.80 = 1.80
3 0.64 1.00 + 0.80 + 0.64 = 2.44
4 0.51 1.00 + 0.80 + 0.64 + 0.51 = 2.95
5 0.41 1.00 + 0.80 + 0.64 + 0.51 + 0.41 = 3.36
6 0.33 1.00 + 0.80 + 0.64 + 0.51 + 0.41 + 0.33 = 3.69
 Is there an easier way of doing the arithmetic?

chocolate marginal total

bars benefit benefit
1 1.00 1.00 = 1.00
2 0.80 1.00 + 0.80 = 1.80
3 0.64 1.00 + 0.80 + 0.64 = 2.44
4 0.51 2.44 + 0.51 = 2.95
5 0.41 2.95 + 0.41 = 3.36
6 0.33 3.36 + 0.33 = 3.69
Total benefit of n bars
= total benefit of n – 1 bars + marginal benefit of nth bar
 Marginal and total benefit
Total benefit of 2 bars is
= MB bar 1 (total benefit 1 bar) + MB bar 2

Total benefit 3 bars

= MB bar 1 + MB bar 2 + MB bar 3
= total benefit 2 bars + MB bar 3

Total benefit 4 bars

= MB bar 1 + MB bar 2 + MB bar 3 + MB bar 4
= total benefit 3 bars + MB bar 4
 Finding total benefit from
the graph of marginal benefit
 marginal and total benefit
1.50

1.00

0.50 marginal marginal marginal marginal

benefit of benefit of benefit of benefit of
bar 1 bar 2 bar 3 bar 4
0.00
1 2 3 4
Show the total benefit of 1 bar
 marginal and total benefit
1.50

1.00

0.50 marginal marginal marginal marginal

benefit of benefit of benefit of benefit of
bar 1 bar 2 bar 3 bar 4
0.00
1 2 3 4
Show the total benefit of 2 bars
 marginal and total benefit
1.50

1.00

0.50 marginal marginal marginal marginal

benefit of benefit of benefit of benefit of
bar 1 bar 2 bar 3 bar 4
0.00
1 2 3 4
Show the total benefit of 3 bars
 marginal and total benefit
1.50
Total benefit is the area under
the marginal benefit graph.
1.00

0.50 marginal marginal marginal marginal

benefit of benefit of benefit of benefit of
bar 1 bar 2 bar 3 bar 4
0.00
1 2 3 4
Show the total benefit of 4 bars
 Total
benefit
curve

marginal
benefit
curve
area under
marginal
benefit curve
Finding marginal benefit
from total benefit
total benefit of n bars
= total benefit of ‘n – 1’ bars + marginal benefit of nth bar

so

marginal benefit of nth bar

= total benefit of n bars – total benefit of ‘n – 1’ bars.
chocolate
bars total benefit marginal benefit
1 1.00 1.00 = 1.00
2 1.80 1.80 - 1.00 = 0.80
3 2.44 2.44 - 1.80 = 0.64
4 2.95 2.95 - 2.44 = 0.51
5 3.36
6 3.69
chocolate
bars total benefit marginal benefit
1 1.00 1.00 = 1.00
2 1.80 1.80 - 1.00 = 0.80
3 2.44 2.44 - 1.80 = 0.64
4 2.95 2.95 - 2.44 = 0.51
5 3.36 3.36 - 2.95 = 0.41
6 3.69 3.69 - 3.36 = 0.33
3.50
chocolate total
3.00
total benefit bars benefit
2.50
1 1.00
2.00
2 1.80
1.50
3 2.44
1.00 4 2.95
0.50
0.00
1 2 3 4
3.50 Marginal
3.00 benefit is the
gradient of
2.50
the tangent
2.00
line.
1.50 0.8
1.00
1
0.50
0.00
1 2 3 4
 Total gradient of the
benefit tangent to the total
curve benefit curve.

marginal
benefit
curve
The relationship between
marginal and total benefit
 Total gradient of the
benefit tangent to the total
curve benefit curve.

marginal
benefit
curve
area under
marginal
benefit curve
Graphs of marginal and total
and calculus
3.50 Marginal
3.00 benefit is the
gradient of
2.50
the tangent
2.00
line.
1.50 0.8
1.00
1
0.50
0.00
1 2 3 4
100 gm bars of chocolate
 With a smooth
3.5 curve how can
3 you find the
2.5 gradient of the
2 tangent using
1.5 calculus?
1
Differentiate
0.5
0
1 4 7 10 13 16 19 22 25 28 31 34 37 40
10 gm pieces of chocolate
 With a smooth
3.5 curve how can
3 you find the
2.5 gradient of the
2 tangent using
1.5 calculus?
1
Differentiate
0.5
0
1 4 7 10 13 16 19 22 25 28 31 34 37 40
10 gm pieces of chocolate
 Is the
3.5 function
3 increasing or
2.5 decreasing if
2 the derivative
1.5 is positive?
1
0.5 Increasing
0
1 4 7 10 13 16 19 22 25 28 31 34 37 40
10 gm pieces of chocolate
 total Differentiate total
with benefit to find the
benefit
calculus gradient of the
tangent
marginal
benefit
 marginal and total benefit
1.50
Total benefit is the area under
the marginal benefit “curve”.
1.00

0.50
total benefit of 4 bars
0.00
1 2 3 4
100 gm bars of chocolate
With smaller units of chocolate marginal benefit
approximates a smooth curve.
1.2
1
0.8
0.6
0.4
0.2
total benefit of 40 pieces
0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39

10 gm pieces of chocolate
 total Differentiate total
with benefit to find the
benefit
calculus gradient of the
tangent

marginal
benefit
Integrate marginal
benefit to find the
area under the
curve
 Text books draw smooth curves
• Very convenient.

• A very good approximation for the individual if they

consume many units – e.g. chocolate bars per year.

• A very good approximation for the entire market if

there are a large number of consumers, even if each
consumes 1 unit – e.g. cars.
Marginal benefit and the
demand curve
P
Supply

P0

Demand

Q0 Q

45
 Deriving the demand curve
Suppose a consumer can buy chocolate bars at a price
p = 0.5 and chooses the number of chocolate bars n to
MAXIMIZE Net benefit of n bars

Net benefit of n bars

= total benefit of n bars - cost of n bars
= total benefit of n bars – 0.5 × n
number of total total cost net How many
bars benefit benefit at bars are
n price 0.5 needed to
1 1.00 0.5 0.50 maximize
2 1.80 1 0.80 net benefit
3 2.44 1.5 0.94 at price 0.5?
4 2.95 2 0.95
5 3.36 2.5 0.86 4 bars
6 3.69 3 0.69
number of additional
With price p
bars total marginal net benefit = 0.5
n benefit benefit with price 0.5 increasing
1 1.00 1.00 1.00 - 0.5 = 0.50 the number
2 1.80 0.80 0.80 - 0.5 = 0.30 of bars
3 2.44 0.64 0.64 - 0.5 = 0.14 increases
4 2.95 0.51 0.51 - 0.5 = 0.01 net benefit
5 3.36 0.41 0.41 - 0.5 = -0.09 if marginal
6 3.69 0.33 0.33 - 0.5 = -0.17
benefit >
price marginal benefit, total Net Benefit is maximum price = 0.5.
number of additional With price p
bars total marginal net benefit = 0.5
n benefit benefit with price 0.5 increasing
1 1.00 1.00 1.00 - 0.5 = 0.50 the number
2 1.80 0.80 0.80 - 0.5 = 0.30 of bars
3 2.44 0.64 0.64 - 0.5 = 0.14 decreases
4 2.95 0.51 0.51 - 0.5 = 0.01 net benefit
5 3.36 0.41 0.41 - 0.5 = -0.09 if marginal
6 3.69 0.33 0.33 - 0.5 = -0.17 benefit <
price marginal benefit, total Net Benefit is maximum price = 0.5.
number of additional How many
bars total marginal net benefit bars are
n benefit benefit with price 0.75 needed to
1 1.00 1.00 1.00 - 0.75 = maximize
2 1.80 0.80 0.80 - 0.75 = net benefit
3 2.44 0.64 0.64 - 0.75 = at price
4 2.95 0.51 0.51 - 0.75 = 0.75?
5 3.36 0.41 0.41 - 0.75 =
6 3.69 0.33 0.33 - 0.75 =

price marginal benefit, total Net Benefit is maximum

 Demand

• Demand is lower when the price is higher.

• We want a graph of the demand curve. This requires

comparing marginal benefit and price.
 If marginal benefit > p = 0.50
increasing no of bars increases
1.50 net benefit.
marginal benefit
1.00

0.50
price = 0.5
0.00
1 2 3 4 5 6
 If marginal benefit < p = 0.50
increasing no of bars
1.50 decreases net benefit.
marginal benefit
1.00

0.50
price = 0.5
0.00
1 2 3 4 5 6
 With price p = 0.5, 4 bars
maximizes net benefit.
1.50

1.00

0.50

0.00
1 2 3 4 5 6
 Demand is at the point where the price
line crosses the marginal benefit curve.
1.50
marginal benefit
1.00

0.50 price = 0.75

0.00
1 2 3 4 5 6
With p = 0.75 demand = 2.
The marginal benefit curve is the demand curve.

1.50
marginal benefit
1.00

0.50

0.00
1 2 3 4 5 6
Finding net benefit
graphically
 Net benefit for a consumer
• Total benefit – total cost

• Where total cost = price × quantity

1.50

1.00
price
0.50 total
benefit
0.00
1 2 3 4 5 6
 Total cost = price x quantity
1.50

1.00
price
0.50 total cost

0.00
1 2 3 4 5 6
1.50
net benefit = consumer surplus
1.00
price
0.50

0.00
1 2 3 4 5 6
price
Consumer surplus with a smooth
demand curve.

marginal benefit = demand curve

quantity n
price

net benefit
= consumer surplus

marginal benefit = demand curve

0 quantity n
 Shifts in the demand curve

•Change in how much you like chocolate

•Change in the price of another good

•Change in income.
 More sophisticated treatment of consumer
theory
• Indifference curves depend only on how much you
like different goods.

• Budget line depends on prices of all goods and

income.

• Interpretation of areas under demand curves is

essentially the same.
Marginal cost and the supply
curve
 Marginal and total cost
• Marginal cost is the cost of producing one more unit.

• Marginal cost of 3rd unit = total cost of 3 units – total

cost of 2 units

• Total cost of 3 units = sum marginal cost units 1, 2

and 3.
Drinks marginal cost total cost
1 1.00 1.00
2 1.40 2.40
3 1.96 4.36
4 2.74 7.10
5 3.84 10.95
6 5.38 16.32

Total cost 3 drinks = MC drink 1 + MC drink 2 + MC drink 3

MC drink 3 = total cost 3 drinks – total cost 2 drinks

6.00
5.00
4.00
Marginal cost
3.00
2.00
1.00
0.00
1 2 3 4 5 6
6.00
5.00
4.00
3.00
2.00
1.00
Total cost
0.00
1 2 3 4 5 6
 Price taking
Perfect competition implies that firms are price takers

Nothing a firm does affects the price at which it sells.

Economists often assume that firms chose output Q that

maximizes profits. At price p these are

Profit = pQ - total cost

 marginal profits at p = 3 profits at p = 4
output total cost
cost Marginal Benefit= 3 MarginalBenefit=4
1 1.00 1.00 3 - 1.00 = 2.00 4 - 1.00 = 3.00
2 1.40 2.40 6 - 2.40 = 3.60 8 - 2.40 = 5.60
3 1.96 4.36 9 - 4.36 = 4.64 12 - 4.36 = 7.64
4 2.74 7.10 12 - 7.10 = 4.90 16 - 7.10 = 8.90
5 3.84 10.95 15 - 10.95 = 4.05 20 - 10.95 = 9.05

6 5.38 16.32 18 - 16.32 = 1.68 24 - 16.32 = 7.68

 marginal
output
cost
total cost profits at p = 3 profits at p = 4
1 1.00 1.00 3 - 1.00 = 2.00 4 - 1.00 = 3.00
2 1.40 2.40 6 - 2.40 = 3.60 8 - 2.40 = 5.60
3 1.96 4.36 9 - 4.36 = 4.64 12 - 4.36 = 7.64
4 2.74 7.10 12 - 7.10 = 4.90 16 - 7.10 = 8.90

5 3.84 10.95 15 - 10.95 = 4.05 20 - 10.95 = 9.05

6 5.38 16.32 18 - 16.32 = 1.68 24 - 16.32 = 7.68

price marginal cost, total profit is maximum

 If marginal cost < p = 3
increasing output increases profits
6.00
5.00 marginal cost
4.00
3.00
2.00
1.00
0.00
1 2 3 4 5 6
 If marginal cost > p = 3
increasing output decreases profits
6.00
5.00 marginal cost
4.00
3.00
2.00
1.00
0.00
1 2 3 4 5 6
For a price taking firm marginal cost is the supply curve.
6.00
5.00 marginal cost
4.00
3.00
2.00
1.00
0.00
1 2 3 4 5 6
At p = 3 supply is 4.
For a price taking firm marginal cost is the supply curve.
6.00
5.00 marginal cost
4.00
3.00
2.00
1.00
0.00
1 2 3 4 5 6
At p = 4 supply is 5.
For a price taking firm marginal cost is the supply curve.
6.00
5.00 marginal cost
4.00
3.00
2.00
1.00
0.00
Total cost of 4
1 2 3 4 5 6
For a price taking firm marginal cost is the supply curve.
6.00
5.00 marginal cost
4.00
3.00
2.00 Total revenue from
1.00 selling 4 at price 3
0.00
Total cost of 4
1 2 3 4 5 6
 For a price taking firm marginal cost is the supply curve.
6.00
5.00
MC
4.00
3.00
producer surplus
2.00
1.00
0.00
1 2 3 4 5 6
If there are no fixed costs producer surplus = profit
Marginal and total costs with a
smooth marginal cost curve
MC =
supply

output
 MC =
supply

total cost

output
 MC =
supply

total revenue
total cost

output
 MC =
supply

producer surplus

output
If there are no fixed costs producer surplus = profit
Decreasing marginal benefit
and increasing marginal cost
 Marginal benefit and marginal cost
• Consumer
• Decreasing marginal benefit
• Constant marginal cost = price

• Price taking producer

• Constant marginal benefit = price
• Increasing marginal cost
 Decreasing marginal benefit, increasing marginal cost
6.00
5.00 marginal cost
4.00
3.00
2.00
1.00
marginal benefit
0.00
1 2 3 4 5 6 n
If MB > MC increasing output increases total net benefits.
If MB < MC increasing output decreases total net benefits.
 Decreasing marginal benefit, increasing marginal cost
6.00
5.00 marginal cost
4.00
3.00
2.00
1.00
marginal benefit
0.00
1 2 3 4 5 6 n
MB > MC if n < 4, MB < MC if n ≥ 4
n = 3 maximizes total net benefits.
 Decreasing marginal benefit, increasing marginal cost
6.00
5.00 marginal cost
4.00
3.00
net benefit
2.00
1.00
marginal benefit
0.00
1 2 3 4 5 6 n
MB > MC if n < 4, MB < MC if n ≥ 4
n = 3 maximizes total net benefits.
 Smooth curves

MC

MB

0 n
MB = MC maximizes total net benefits.
 MC
net benefit
MB

0 n
 Marginals and totals
• Relate to each other graphically

• Marginal: gradient of tangent to total

• Total is area under marginal curve.

• Directly useful thinking about firms

• As if model for consumers.

 Advantages of thinking with marginals
• Easier to estimate than totals, particularly for a firm with fixed
costs.

• With one activity tells you directly whether it would be better to

increase or decrease an activity.

• Multiple activities

• consider putting $1 more into each activity, what is the marginal

benefit?

• Expand the activity with the highest positive marginal benefit.