Think at the margin

A delivery driver is nearly home when another order appears. It pays $14. Taking it uses $3 of fuel and forty minutes that the driver values at $9, making the additional cost $12 under these assumptions. Accepting adds $2 of net benefit.

The car's purchase price does not settle this decision. Any extra wear caused by the delivery would matter, however, and should be added if the estimate has left it out. Only costs and benefits that differ between accepting and declining belong in this comparison.

Marginal means additional

A café considering another hour of opening needs to estimate the sales that hour would bring and the costs it would add, including the owner's time. Yesterday's average sales per hour answer a different question.

Suppose the extra hour brings $90 in sales, requires $45 for ingredients and hourly staff, and keeps the owner from an evening activity worth $30 to them. Net benefit rises by $15. Rent remains payable even if the café closes early, so it does not change this particular calculation.

Fixed and sunk differ. A cost is fixed when it stays unchanged with output over a specified period, while a sunk cost is a payment you cannot recover. A monthly lease may be fixed now yet avoidable when renewal comes due. Check the decision date.

Choose the next unit, then check again

Suppose an extra half-hour of study gives you an expected benefit worth $12 and costs $5 in forgone leisure, with the next session offering $7 of benefit. Both sessions add net benefit. A third offers only $3 for the same $5 cost, so taking it would reduce your gain.

The order matters. This next-unit rule works cleanly when added benefits decline or added costs rise, so the favorable increments come before the unfavorable ones. Bundles and startup costs need another check. A machine that becomes useful only after installation must be evaluated as a feasible project, including the installation cost and the benefits that become available afterward. Stopping at the first bolt misses that choice.

At a tie, the additional unit leaves net benefit unchanged. Discrete choices may never offer a unit whose marginal benefit exactly equals its marginal cost, and the best available quantity can still be identified.

Use totals to check your answer

The study example gives a quick arithmetic check. Two sessions add ($12 − $5) + ($7 − $5), or $9, whereas taking the third session cuts the total gain to $7. Marginal and total calculations agree.

When a large past payment makes you hesitate, compare the costs that still differ between your options, including recoverable value, additional risk, and time you could use elsewhere. Leave out payments that remain unchanged whichever option you choose.

Watch the idea in action

A related lesson from Marginal Revolution University. Read the examples above alongside the video.

Open the video on YouTube · Educator lesson and source

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