Glossary
Benefits
The gains, advantages, or positive outcomes received from a decision, project, or policy.
Example:
The benefits of exercising regularly include improved health, increased energy, and reduced stress.
Cost-Benefit Maximizing Principle
The rule that total benefit (or surplus) is maximized when the marginal benefit of an action equals its marginal cost (MB = MC).
Example:
A company applies the Cost-Benefit Maximizing Principle by hiring workers up to the point where the additional revenue from the last worker equals their wage.
Cost-benefit analysis
A systematic process used to evaluate a decision, project, or policy by comparing the total expected costs with the total expected benefits.
Example:
Before building a new public park, a city conducts a cost-benefit analysis to determine if the environmental and recreational benefits outweigh the construction and maintenance expenses.
Costs
The sacrifices or expenditures incurred to obtain a good, service, or achieve a particular outcome.
Example:
The costs of opening a new coffee shop include rent, coffee beans, and employee wages.
Diminishing Marginal Utility
The principle that as a consumer consumes more units of a good, the additional satisfaction gained from each successive unit tends to decrease.
Example:
The first cookie you eat is amazing, but due to diminishing marginal utility, the tenth cookie provides much less additional satisfaction.
Explicit Costs
Direct, out-of-pocket monetary expenses that are easily identifiable and recorded in financial statements.
Example:
When a student attends college, tuition fees, textbook purchases, and dormitory rent are all explicit costs.
Implicit Costs
Indirect, non-monetary costs representing the value of the next best alternative that was foregone when a choice was made.
Example:
If an entrepreneur quits a high-paying job to start a business, the salary they could have earned is an implicit cost of their new venture.
Law of Diminishing Marginal Utility
A fundamental economic principle stating that as consumption of a good or service increases, the marginal utility derived from each additional unit eventually declines.
Example:
This Law of Diminishing Marginal Utility explains why people don't buy an infinite number of identical items, as the satisfaction from each extra unit eventually isn't worth the cost.
Marginal Benefit
The additional satisfaction or utility gained from consuming one more unit of a good or service.
Example:
If the first scoop of ice cream gives you 10 utils, and the second gives you 7 utils, the marginal benefit of the second scoop is 7 utils.
Marginal Cost
The additional cost incurred from producing or consuming one more unit of a good or service.
Example:
If producing 10 widgets costs 108, the marginal cost of the 11th widget is $8.
Marginal Surplus
The difference between the marginal benefit and the marginal cost of consuming or producing an additional unit of a good or service.
Example:
If the marginal surplus of buying a new video game is positive, it means the additional enjoyment outweighs the additional cost.
Negative Marginal Utility
A situation where consuming an additional unit of a good or service actually decreases total satisfaction or utility.
Example:
After eating too much candy, consuming one more piece might lead to a stomachache, resulting in negative marginal utility.
Opportunity Costs
The value of the next best alternative that must be given up when a choice is made.
Example:
Choosing to spend Saturday studying for the AP Microeconomics exam means the opportunity cost is the fun movie night with friends you missed.
Total Benefit
The overall satisfaction or utility gained from consuming a specific quantity of a good or service.
Example:
After eating three slices of pizza, the total benefit might be 15 utils of satisfaction.
Total Cost
The overall expenditure incurred for consuming a specific quantity of a good or service.
Example:
If each slice of pizza costs 12.
Utils
Imaginary units used to quantify the amount of satisfaction or utility a consumer derives from consuming a good or service.
Example:
A student might gain 5 utils from drinking their first cup of coffee in the morning.