Marginal Value relates to how much of something we have.
Generally speaking the Marginal Value for an item decreases as the quantity of items that we have increases.
For example suppose you are starving and someone gives you one cookie. That cookie has immense Marginal Value to you.
Now suppose they give 1 more. That one also has a great deal of Marginal Value, but not as much as the first one, because you are somewhat satisfied.
Now suppose they give you 1000 more cookies. You eat 100 and can’t eat any more. The remaining cookies have zero Marginal Value to you.
We sell high precision Robotic Gears with
purchase cost $400,000 and
sales price $700,000.
We expect to see
7 of these, plus or minus
Suppose on average we always carry
10 units. The
average inventory level is
We end up only selling
3 each year. The remaining
7 units that we carried had zero Marginal Value.
They only added
marginal cost, because the
cost of capital for these items is high.