Micro Chapter 3

Opportunity Cost

An opportunity cost is the cost associated with forgoing the opportunity to employ a resource in its best alternative use.

Sunk Cost

A sunk cost is a cost that the decision maker has already incurred, or to which she has previously committed. It is unavoidable.

Net Benefit

Net benefit equals total benefit less total cost.

Marginal Benefit of an Action

The marginal benefit of an action at an activity level of X units is equal to the extra benefit produced by the marginal units, B(X) - B(X - ΔX), divided by the number of marginal units, ΔX.

Marginal Cost of an Action

The marginal cost of an action at an activity level of X units is equal to the extra cost incurred due to the marginal units, C(X) - C(X - ΔX), divided by the number of marginal units, ΔX.

Marginal Units

The marginal units of action choice X are the last ΔX units, where ΔX is the smallest amount one can add or subtract.