Why this reading. Your worksheet asks you to analyze three real decisions — one of your own, one a business makes, one a government makes — and for each to give the opportunity cost, the marginal benefit and marginal cost of doing a little more, and one incentive that would change the answer. This reading works all three decisions out in full so you can see what a finished analysis looks like, and gives you the real rates and rules you need to do your own. What to look for: in each worked decision, find the sentence that says what was given up, and the sentence that compares one more unit rather than the whole activity. Those are the two moves the worksheet is testing.

1. Scarcity is the reason economics exists

Scarcity is not the same as poverty, and it is not the same as running out. Scarcity means that the resources available — hours, dollars, land, workers, attention — are limited relative to the uses people would like to put them to. A billionaire faces scarcity of time; a city with a large budget faces scarcity of land. Because resources are limited and wants are not, every use of a resource is also a refusal of some other use. That refusal is the subject of this lesson.

2. Opportunity cost is what you gave up, not what you paid

The opportunity cost of a choice is the value of the best alternative you gave up to make it. The two errors students make are opposite ones:

1. Counting only money paid. A concert with a free ticket is not free if you turned down a paid shift to attend it. If the shift would have paid $120, the opportunity cost of the concert is that $120 plus anything else the evening displaced — sleep, study time, a family obligation. “Free” describes the price, not the cost.
2. Counting every alternative. Opportunity cost is the best alternative forgone, not the sum of all of them. You cannot both work the shift and study and sleep; you count the one you would actually have chosen.

This is why economists say the cost of a university degree is not only tuition. A student who studies full time for four years gives up four years of earnings as well. Those forgone earnings are usually the larger number.

3. Reasoning at the margin

Very few real decisions are all-or-nothing. The useful question is almost never “should I study?” but “should I study one more hour?” The extra benefit from one more unit is the marginal benefit; the extra cost of that unit is the marginal cost. Keep going while marginal benefit exceeds marginal cost; stop where they meet.

Marginal analysis has a property that surprises people: total costs and benefits are irrelevant to it. A restaurant can be enormously profitable overall and still be right to close at nine o’clock, if the tenth hour brings in less than the wages and electricity it consumes. And a business can be losing money overall and still be right to stay open tonight, if tonight’s takings more than cover tonight’s extra costs.

The mirror image of that rule is the sunk cost: money or time already spent that cannot be recovered. A sunk cost is the same whatever you now choose, so it cannot change which choice is better. Staying at a bad film because you paid $15 does not recover the $15; it spends ninety minutes on top of it.

4. Incentives, monetary and nonmonetary

An incentive is anything that changes the costs or benefits of a choice. It is useful to sort them:

Two wage floors you will need as numbers rather than adjectives: the federal minimum wage has been $7.25 per hour since 24 July 2009, and California’s statewide minimum wage is $16.90 per hour from 1 January 2026 for employers not covered by a higher industry or local rate.

Incentives can misfire. Any incentive rewards the thing it measures, which is not always the thing anyone wanted. A bounty paid per animal killed rewards producing animals to kill. A deposit refunded on containers rewards bringing containers in, including containers bought where no deposit was paid. A school rewarded for its average test score has a reason to care about the students near the passing mark and less reason to care about the rest. When you name an incentive in your worksheet, write one sentence on what it would reward if someone gamed it.

5. Positive and normative

A positive statement claims something about how the world is, and evidence can in principle settle it. A normative statement claims something about how the world ought to be, and evidence alone cannot settle it, because it also rests on values. Sort these:

Words like should, ought, unfair, too high and deserve signal a normative claim. Numbers alone do not make a claim positive: “the tax is too high at 50¢” is normative with a number in it.

6. Worked decision one — a student’s Saturday

Maya has a Saturday free. She can work a six-hour shift at $18 an hour, or spend the day on an SAT practice test and review.

• Opportunity cost of studying: the shift, worth 6 × $18 = $108 before tax, plus whatever the day would otherwise have held. The opportunity cost of working is the expected score gain from the study day.
• At the margin: the choice is rarely all six hours. Suppose the first study hour is worth a lot (she reviews the question types she always misses) and the sixth is worth little (she is tired and re-reading things she knows). Each hour of study costs $18 of forgone wages — the marginal cost is flat. The marginal benefit falls as the day goes on. She should study until the extra value of one more hour drops to about $18, then work the rest.
• A sunk cost to ignore: she has already paid $60 for the practice book. That $60 is gone whether she opens it today or not, so it should not push her into a sixth hour.
• An incentive that would change the decision: if her employer offered time-and-a-half for Saturdays, the marginal cost of each study hour would rise to $27 and she would study fewer hours. A scholarship that paid out at a score threshold would raise the marginal benefit of the hours near that threshold and she would study more.
• Labels: “A higher Saturday wage would lead Maya to study fewer hours” is positive. “Maya ought to study, because education matters more than money” is normative.

7. Worked decision two — a café’s closing time

A café currently closes at 8 p.m. and is deciding whether to stay open until 9.

Notice what the table leaves out. Rent and the loan payment are real costs of being in business, and if they cannot be covered the café should eventually close altogether — but they are the same at 8 p.m. and at 9 p.m., so they cannot decide this question. Notice too that there is a nonmonetary cost the owner may weigh: an hour of her own evening. If she values that hour at more than $39.20, she closes at eight and is behaving rationally.

• Opportunity cost of staying open: the owner’s evening, and the use the staff, the space and the cash could have had instead.
• An incentive that would change the decision: a local ordinance requiring a premium for hours after 8 p.m. would raise marginal cost; a nearby cinema changing its last screening to 8.30 would raise marginal benefit.

8. Worked decision three — a state’s container deposit

California requires a deposit on beverage containers: 5¢ under 24 ounces, 10¢ at 24 ounces or more, 25¢ on certain wine and spirits containers. The state is deciding whether to raise the small-container deposit from 5¢ to 10¢.

• Opportunity cost: not the deposits themselves — those are returned to whoever brings the container back, so they are a transfer rather than a cost. The real resources given up are the trucks, sorting centers, staff hours and shoppers’ time used to move containers around. Those people and machines could be doing something else. That is the cost.
• At the margin: the question is not “is recycling good?” but “what does the next five cents buy?” If most easily-returned containers already come back at 5¢, the extra nickel is chasing the containers that are hardest to recover — the ones left in park bins and stadium seats. Marginal cost per additional container recovered rises as the easy ones are exhausted; marginal benefit per container is roughly constant. There is therefore a deposit above which the program costs more than the material is worth.
• Who gains and who loses: people who return containers get their money back; people who do not return them pay the deposit and never reclaim it, which falls hardest on those without a car or a nearby redemption center. Retailers bear handling costs. This distribution question is separate from the efficiency question, and both belong in a policy analysis.
• An incentive that would change the decision: paying redemption centers a higher handling fee would change how many centers exist and therefore how costly it is for a household to return a container — a nonmonetary cost (time and distance) that the monetary incentive cannot fix on its own.
• Labels: “Raising the deposit to 10¢ would increase the number of small containers returned” is positive. “The deposit is unfair to people who live far from a redemption center” is normative — though it rests on a positive claim (that such people return fewer containers) which could be checked.

9. The checklist for your own three decisions

1. State the decision as a choice between two specific alternatives, not as a topic.
2. Name the best alternative given up, and put a number or a concrete description on it.
3. Identify what “one more unit” means here — one more hour, one more container, one more customer — and give the marginal benefit and marginal cost of that unit.
4. Name one cost that is not marginal and say why it should be ignored.
5. Name one incentive that would flip the decision, say whether it is monetary or nonmonetary, and say what it would reward if someone gamed it.
6. Label each of your claims positive or normative, and for each normative one, name the value it rests on.