SPILT MILK AND OTHER SUNK COSTS

Sometime in your life you have probably been told, “Don’t cry over spilt milk,or Let bygones be bygones.These adages hold a deep truth about rational decision making. Economists say that. a cost is a sunk cost when it has already been committed and cannot be recovered, In a sense, a sunk cost is tile opposite of an opportunity cost: An opportunity cost is what you have to give up if you choose to do open thing instead of another, whereas a sunk cost is one that cannot be avoided, regardless. of the voices make. Because nothing can be done about sunk costs, you can ignore them when making decisions various aspects of life, including business strategy.

Figure 3 The Competitive firm’s Short-Run Supply Curve

The irrelevance of sunk costs is also important when making personal decisions. Imagine, for instance, that you place a $10 value on seeing a newly released movie. You buy a ticket for $7, but before entering the theater, you lose the ticket. Should you buy another ticket? Or should you now go home and refuse to pay a total of $14 to see the movie? The answer is that you should buy another ticket. The benefit of seeing the movie ($10) still exceeds the opportunity cost (the $7 for the second ticket). The $7 you paid for the lost ticket is a sunk cost. As with spilt milk, there is no point in crying about it.

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