Cost-Benefit Analysis
Definition
Cost-benefit analysis is a decision-making tool used to evaluate the potential benefits and costs of an action or decision. It involves weighing the positive outcomes or rewards against the negative consequences or sacrifices.
Analogy
Think of cost-benefit analysis as deciding whether to buy a new video game. You consider the cost (the price of the game) versus the benefit (the enjoyment and entertainment you will get from playing it). If the benefit outweighs the cost, it's worth purchasing.
Related terms
Incentives: Factors that motivate individuals to act in a certain way based on perceived benefits or rewards.
Opportunity Cost: The value of what is given up when choosing one alternative over another.
Rational Choice Theory: The idea that individuals make decisions by weighing costs and benefits to maximize their own self-interest.
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