Principles of Microeconomics / Unit 1 MIC 0022 worked example, 60 to 90 seconds
How Many: Marginal Benefit Against Marginal Cost
The idea
To choose a quantity, compare the benefit and the cost of each additional unit in turn and stop at the last unit whose marginal benefit is at least its marginal cost. Never compare totals, and never count a cost already sunk. List each unit's marginal benefit, which usually falls; list its marginal cost, which usually rises; take every unit where benefit covers cost; and set aside anything already spent, which is the same whatever is chosen.
In practice
Worked example: a café is deciding how many extra hours to stay open after six. Each extra hour brings in thirty dollars of sales. The cost of staying open rises: twelve dollars for the first hour, eighteen for the second, twenty-six for the third, thirty-four for the fourth. The first three hours each earn more than they cost; the fourth costs more than it earns. So the café stays open three more hours. The month's rent, already paid, changes nothing.
Where people slip
The tempting error is to compare a total benefit of one hundred twenty dollars with a total cost of ninety and conclude that the fourth hour is fine because the total still shows a profit. Totals hide the unit that loses money. The second error is to add the rent back in, turning a sunk cost into a reason to stay open or to close, when it is a reason for neither.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
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