Marginal Value | Concept

Ole Ersoy
Sep - 20  -  1 min

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.

Examples

Cookie

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.

Service Parts

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 4 annually.

Suppose on average we always carry 10 units. The average inventory level is 10 units.

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.