When we talk about marginal cost and marginal benefit/cost, why does the equilibrium point is the most convenient for the production of a product. If the marginal cost and the marginal benefit/revenue are the same Wouldn't the cost of producing a product would be the same as the revenue you obtain from selling it? Wouldn't you be earring nothing when you reach the equilibrium point?

Extra question; Are marginal benefit and marginal revenue the same concept?


The point where MB = MC is the largest Net Benefit available for a given product. Therefore, any additional benefit has a lower level of benefit than at equilibrium, and the costs increase at a higher rate than at equilibrium. In the context of supply and demand, this is where the two lines cross. But if you think about it in terms of diminishing marginal benefit, and increasing marginal costs then you can see why it is beneficial to product where the largest net benefit occurs.

The following graph is from Markets and the Environment by Keohane and Olmstead and deals with abatement costs, but it is the one graph I think about when someone asks this sort of question because it provides a good example.

As you can see from the graph, the largest net benefit is the furthest distance between the benefit and cost curves. If you were to take the derivative of each of these functions, you would get linear supply and demand lines, where the largest net benefit is the cross section of the lines (as you can see in the graph below).

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Marginal revenue and cost capture small, local changes in quantity. I.e. if MR=MC, it doesn't necessarily mean that the firm makes zero profit - it means that any small change in quantity produced would affect revenue and costs by the same amount, so profits wouldn't change. Which, if you think about it, is exactly what should be the case if the firm maximizes profits - otherwise it could get higher profits by expanding/decreasing production by a little bit.

Marginal benefit is a more general term. while marginal revenue deals specifically with, well, revenue. One could say that the revenue is a particular case of benefit when speaking about firms and production, so in this situation the two are equivalent. In other situations, marginal benefit may mean something else, e.g. change in utility for a consumer.

Welfare is value minus cost, for every unit sold/bought.

In a world where one unit of X good is sold, it would go to the highest bidder. The second unit would go to the second highest bidder and would cost more to produce (marginally) than the last unit.

If you carry this logic forward, at some point the next unit's marginal benefit (to the consumer) will be equal to the marginal cost (to the producer)**. The last consumer flipped a coin when purchasing since she got the same profit from purchasing and not purchasing.

Similarly, the producer also was indifferent between producing and not producing the last unit.

What if we supply ONE MORE unit than the equilibrium price? It would mean that the marginal cost exceeds the marginal benefit. The world and the individuals transacting are worse off after this transaction because the costs exceeded the benefit. This is known as dead weight loss.

Marginal benefit:

To consumers: benefit is how much they were willing to pay for a good/service
MINUS what they had to pay/trade-off to obtain it (price). On the margin, this
is the net benefit of the **next unit** bought.

to producers: how much a unit is sold for (price) MINUS what it cost to
produce. On the margin, this is the benefit of the **next unit** sold.

Revenue is similar to this except it does not take into account the cost of production. So if my total revenue is \$100 and selling the next unit would get me to \$105 total revenue, my marginal revenue for that unit was \$5. Regardless of how much the next unit cost to produce.


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