Marginal Benefit and Marginal Cost

Marginal Benefit and Marginal Cost

• Marginal Benefit is the additional benefit consumers get from consuming one extra unit of a product. It is represented by the demand curve.
• Marginal Cost is the additional cost of producing one more unit for the seller. It is represented by the supply curve.

• Allocative (Pareto) Efficiency - when no one can be made better off without making someone else worse off. Allocative efficiency is achieved when we are at equilibrium (marginal cost = marginal benefit). Anything past that quantity is inefficient.
• In the diagram above, for any output less than 15 the marginal benefit is

  greater

  ---

  than the marginal cost and there should be

  more

  ---

  units produced to reach allocative efficiency
• In the diagram above, for any output greater than 15 that marginal benefit is

  less

  ---

  than the marginal cost and there should be

  less

  ---

  units produced to reach allocative efficiency