How to Graph the Marginal Benefit Curve & Make Production Decision? Overview & Explanation.

In this article, we're going to discuss how to graph the marginal benefit curve. When we were doing our production possibilities frontier earlier we were identifying the maximum amount of food and clothing that an economy could produce given the resources that were currently available. We had given an example where we are stranded on an island right and we were trying to determine with our group how much food we were produced and how much clothing we produce. So we plotted out these points and got our little production possibilities frontier here. 

So this little curve is all the different combinations of the maximum amount of food and clothing that we could produce given our current resources and we had said to each point here point A, point B, each of these combinations was efficient. What we meant by when we say efficient is, we could not produce an additional unit of food.

So when we're doing three units of food and four units of clothing just call this point (3, 4), we're doing three units of food and four units of clothing at this point. We couldn't do an additional unit of food without giving up at least one unit of clothing. Then all the areas inside all these points are inefficient we don't want to be there.

Now the question is, if all these are efficient, these are all these points along the curve, everything along the curve is efficient then how do we decide which is the best one? Because we have all these different combinations, how do we decide do we want point A, do we want B, do we want point C, etc?

And we decide by looking at consumer's preferences and how we can allocate efficiency. Now we're talking about efficiency in production when we're talking about the PPF and constructing it and why we couldn't produce an additional unit of food without giving up an additional unit of clothing etc. That's production efficiency, every point along the PPF is efficient in production.

Allocate of efficiency is there's some point along with this the PPF curve that corresponds to people's preferences to the goods that they want the most. There's some bundle of goods and we might make guesses, for example, Let's think about zero food and ten clothing, we might just guess that even though we could produce that bundle of goods but probably people aren't going to be happy in a world where we have zero food.

So if you had indifference curves that actually put an indifference curve and see the one that is tangent to the PPF, that's a little more advanced and we'll talk about that later. I want to show you a simpler way, we're going to just think about the Marginal Benefit. If we know people's marginal benefit the willingness to pay for an additional unit of food and so forth and we also know the marginal cost curve which we can derive from this PPF curve and we have in our last article about it. Then we can find the point where the marginal benefit is equal to the marginal cost. So the marginal benefit of a unit of food where is that equal to the marginal cost and that's going to be our socially efficient level that's gonna be our optimal level of food and clothing.

So that's a little abstract of the marginal cost curve if you haven't read the article where we looked at the marginal cost, from the perspective of producing food. If we want from zero units of food to one additional unit of food, the marginal cost would be one. If we have one unit of food and wanted to get an extra unit of food the marginal cost would be two and so forth. We had an increasing marginal cost curve and that explains why we have a bowed-out shape with the PPF. That proves resources are not all equally productive for each good. Some people are better at producing clothing than food and so forth and if we have everybody producing clothing we're not getting as much benefit for that last unit of clothing we're giving up a lot more in terms of food. So we went through all that before.

Now I want to show you the marginal benefit curve, so marginal benefit is our willingness to pay or consumers or the people on the island. We can look at their willingness to pay, so we could say "Okay, look everybody if you had zero units of food, to get an additional unit of food to go from zero to one unit of food what would you be willing to pay hypothetically? All right and let's say they said five units of clothing they'd be willing to give. 

So if you have zero food the marginal benefit would be you'd be willing to pay, which is five units of clothing to get an additional unit of food. All of this bear in mind that this cannot be derived by the PPF. If you're in an economics class or something, somebody has to give you this information. We got the marginal cost curve from the PPF but we cannot get the marginal benefit information from PPF. When we have one unit of food we'd be willing to pay for four units of clothing and when we're at two units of food that we'd be willing to pay an additional or give up three units of clothing. So when we're at three units of food we'd be willing to give up two units of clothing.

This is based on people's preferences. Now we can actually draw out the line we can draw we've got a little line here.

So we can see that when we made the marginal cost curve the marginal cost was increasing but the marginal benefit curve is decreasing generally and the idea is that people like variety and so they're not good you know as you get more and more of a certain good it's not as valuable to you. Let's just we've got this decreasing marginal benefit curve, as people have no food at all they'd be willing to pay a lot to get some food but then as they get to three food that I'd only be willing to give up two units of clothing to get an extra unit of food.

Now here is where this becomes important and this is how it's gonna tell us when we have that PPF and we say which point do we want along that curve? This is what's gonna tell us because we can look and say where the marginal benefit equals the marginal cost that's the point where we want to be.

So we want to be where the marginal benefit equals the marginal cost so we can look and now we're going to need our marginal cost information,

So if you remember our marginal cost here of food when we had two units of foods and we say what would be the cost to go one extra unit? it was three. Again when we look at the marginal benefit we want marginal costs to equal marginal benefit, right? So when we notice that we're at two food the marginal benefit is also three. So we can see that when we're at two food the marginal cost equals the marginal benefit. 

All right so think about this, why is this the efficient point? Well, let's say we went to three food, if we're at three food then the marginal benefit would be two and the marginal cost would be four. So the marginal cost would actually be higher. So that's why we want the bundle that's the best the one that we prefer the most even though they're all efficient but our production would be two food. So that would be the amount.

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