Chapter 2 - Benefits, Costs, and Maximization

Cost-Benefit Analysis

Weighing the costs and benefits of an action in order to maximize the net benefit from the action

Utility

Satisfaction realized from the consuming of a good or service or taking an action

Marginal Benefit (Marginal Utility)

The change in total satisfaction from consuming an additional unit of a good, service, or activity

Total Benefit (Total Utility)

The total amount of satisfaction received from consuming a specified number of units of a good, service, or activity

Law of Diminishing Marginal Utility

As additional units of an item are consumed, beyond some point each successive unit of the item consumed adds less to total Utility than was added by the unit consumed just before it

Total Cost

The cost of producing a specified number of units of a good, service, or activity

Marginal Cost

The change in Total Cost from each additional unit of a good, service, or activity produced

Net Benefit

The result when Total Cost is subtracted from Total Benefit

Net Benefit Maximizing Rules

Net Benefit is maximized where Total Benefit exceeds Total Cost by the greatest amount, or where Marginal Benefit equals Marginal Cost