Marginal Analysis and Sunk Costs

Every decision about 'how much' or 'how many' comes down to one question: is the next unit worth it? Marginal benefit is what you gain from one more unit of an activity; marginal cost is what that unit costs you. As long as marginal benefit exceeds marginal cost, doing more makes you better off. Once marginal cost exceeds marginal benefit, you've gone too far. The optimum sits exactly where marginal benefit equals marginal cost — past that point, extra units subtract from your net benefit instead of adding to it.

Sunk costs are money or time already spent that cannot be recovered no matter what you choose next. They feel like they should matter, but they don't change the marginal benefit or marginal cost of what's still ahead, so a rational decision ignores them completely. The only question is whether the remaining cost of finishing something is justified by the remaining benefit it will bring. A concert ticket you already paid for doesn't make the show better or worse once you're sitting there deciding whether to stay.

This same logic runs through the rest of microeconomics. A consumer deciding how many units of a good to buy compares marginal utility to price; a firm deciding how much to produce compares marginal revenue to marginal cost. Every one of these is the identical rule — push an activity until the extra benefit from one more unit just equals the extra cost — showing up again and again in different costumes.