Choice and Cost

The frontier bows outward rather than running straight, and the bow carries a claim of its own: the first people the island moves from fishing to the orchards are the ones least useful in a boat, so the first tonnes of fruit have a small opportunity cost in fish, while the last tonnes pull out the island's best fishers and cost a great deal. Each extra unit of a good costs more of the other than the unit before it — the law of increasing opportunity cost, which the source states for a society's frontier³ and which holds whenever resources are not equally suited to every use. A straight frontier would mean the trade-off never changed; the bowed one says the trade-off steepens as a society leans harder toward one good.

Two more readings of the same picture. A point inside the frontier is attainable but wasteful — the island could have more of both simply by using what it has, so an economy inside its frontier is not facing a trade-off yet. A point beyond it is unattainable this season; growth — more people, better boats, better trees — moves the whole frontier outward, and the island then chooses along a new, larger curve. The picture and the increasing-cost reading are the source's; the island is this chapter's own hypothetical.

The source's own illustration of a cost that is mostly time is airport security: it takes the extra half-hour a passenger spends per trip, a rough hourly value of that time, and the number of passengers in a year, and arrives at an opportunity cost in the billions of dollars a year for waiting alone² — no fare was paid for the queue, and it is still a cost. The reverse case is a cost that is mostly money but looks small: the source's worker who buys an eight-dollar lunch when a three-dollar packed one would do gives up five dollars a day, and over a working year that is a holiday's worth².

Two conventions this book keeps, because informal usage does not: cost, said without qualification, means opportunity cost, and price is reserved for money handed over; and the opportunity cost is the value of the single best alternative forgone — every consulted source states it that way¹⁶¹⁴, and the sum-of-alternatives reading double-counts the one evening or the one sum of money that could only go one place.

The reason a sunk cost drops out is arithmetic, not attitude. Write down each option's future costs and future benefits; a cost that appears identically in every column cannot change which column is larger, so it can be struck from all of them without changing the answer. That is also why the rule is symmetric: a large past outlay is no reason to continue, and no reason to stop either — "we've spent a fortune, so by the sunk-cost rule we must abandon it" is the same mistake in reverse. What decides is what remains: the future costs against the future benefits, valued by whoever is choosing.

Two look-alikes are worth separating. A cost is sunk only to the extent it cannot be recovered: a returnable purchase, a deposit still refundable, an asset that can be resold are not sunk, or not fully. And a past cost may still be information — a project that has already cost far more than planned is evidence about how the rest will go — but it enters as a forecast of future cost, not as a debt owed to the past. The consulted sources describe the same split, contrasting sunk with prospective costs, the future costs a present choice can still avoid¹⁵.

Marshall's statement of the pattern is the one the field still uses: "The marginal utility of a thing to anyone diminishes with every increase in the amount of it he already has."¹² The word marginal means "at the edge" — the last unit taken or the next one considered — and marginal reasoning is simply the habit of judging that edge unit on its own terms.

Two consequences follow. First, the best amount of almost anything is rarely zero and rarely "as much as possible": it is the amount at which the next unit would add just less than it costs. Second, the same activity can be worth continuing for one person and worth stopping for another at the same point, because the extra benefit and the extra cost are theirs — the concept fixes what to compare, not what the answer is. The source's phrase for the whole habit is marginal analysis: examining the benefits and costs of choosing a little more or a little less².

Read Ricardo's numbers as opportunity costs and the modern statement falls out. Portugal needs fewer workers than England for cloth and for wine — the absolute advantage in both. But a unit of cloth costs Portugal $90/80$ of a unit of wine, while it costs England only $100/120$ of one; cloth is relatively cheaper in England, wine relatively cheaper in Portugal, and each gains by making the good that costs it less and trading for the other¹⁰¹⁷. Everyday trade rests on the plainer half of the idea, which Adam Smith had stated in 1776: "It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy"¹¹ — the tailor buys his shoes and the shoemaker his coat. Ricardo's step beyond it is the case that seems paradoxical, the family that could make everything more cheaply than its neighbours and still gains by buying some of it. Specialization is also one of the reasons the source gives for why the division of labour raises output at all: workers concentrate on the part of the job where they have an advantage⁶.