Most choices are not all-or-nothing. You rarely decide whether to study, but how many more hours; a café doesn't decide whether to open, but whether to stay open one more hour. The cost of each extra step is an opportunity cost (Opportunity Cost), and economists weigh it one unit at a time: "at the margin."
Key idea
Marginal benefit (MB) is the extra benefit from one more unit; marginal cost (MC) is the extra cost. Keep going while $MB \ge MC$ and stop before the first unit with $MB < MC$. That quantity makes net benefit (total benefit minus total cost) as large as possible. A sunk cost, money already spent that can't be recovered, should not change the choice.
Why it works
Net benefit changes by $MB - MC$ with each unit. While a unit adds more benefit than cost, net benefit rises; once a unit adds less, net benefit falls. So net benefit peaks at the last unit with $MB \ge MC$. Sunk costs drop out for the same reason: the money is gone whichever way you choose, so it lowers every option's net benefit by the same amount, and can't change which option is best.
| Hours open | Total benefit | Total cost | MB | MC |
|---|---|---|---|---|
| 0 | \$0 | \$0 | ||
| 1 | \$20 | \$6 | \$20 | \$6 |
| 2 | \$36 | \$14 | \$16 | \$8 |
| 3 | \$48 | \$24 | \$12 | \$10 |
| 4 | \$56 | \$36 | \$8 | \$12 |
| 5 | \$60 | \$50 | \$4 | \$14 |
Worked example: Stop where MB falls below MC
Using the table, how many hours should the café stay open, and what is its net benefit?
- Compute each hour's MB and MC as the change in the totals (shown in the last two columns).
- Hours 1, 2 and 3 have $MB \ge MC$: \$20 vs \$6, \$16 vs \$8, \$12 vs \$10.
- Hour 4 has $MB = \$8 < MC = \$12$, so stop at 3 hours.
- Net benefit at 3 hours: $\$48 - \$24 = \$24$. At 5 hours it would be only $\$60 - \$50 = \$10$.
Answer: 3 hours, with a net benefit of \$24.
Worked example: A sunk cost
Dana paid \$50 for a nonrefundable concert ticket. On the night, she feels unwell: going would give her \$30 worth of enjoyment but \$40 worth of discomfort and cab fare. Should she go?
- Compare what changes with the choice: going adds \$30 of benefit and \$40 of cost.
- $MB = \$30 < MC = \$40$, so going lowers her net benefit by \$10.
- The \$50 ticket is spent whether she goes or not: it is sunk and drops out.
Answer: No: staying home is better by \$10, whatever the ticket cost.
Common mistake
Two traps. Picking the quantity with the largest total benefit (6 hours in the picture) instead of the largest net benefit (3 hours): beyond 3 hours each extra hour costs more than it brings in. And letting a sunk cost drive the choice: "we already paid for the tickets, so we have to go." Research on decisions finds people do often fall for this. Check: ask "what changes if I choose this?" and count only those benefits and costs.