Marginal Analysis and Cost–Benefit Decisions

The marginal rule

Rational decision makers do not ask "is this activity worth doing?" — they ask "is one more unit worth doing?" Keep going while

and stop at the last unit where marginal benefit still covers marginal cost. The optimum is the quantity where $\text{MB}=\text{MC}$.

Why benefits fall and costs rise

• Diminishing marginal utility — the second slice of pizza is worth less to you than the first, so MB falls as quantity rises.
• Increasing marginal cost — squeezing out extra units means using less suitable resources, so MC rises.

These two forces are exactly why the demand curve slopes down and the supply curve slopes up, and why the PPC bows outward.

Sunk costs are irrelevant

Money already spent cannot be recovered by any future choice, so it belongs in neither MB nor MC. Only costs and benefits that change with the decision count.