What term refers to costs that cannot be recovered once a purchase decision has been made?

The term that refers to costs that cannot be recovered once a purchase decision has been made is called a sunk cost. Sunk costs are expenses that have already been incurred and cannot be changed or influenced by any current or future decisions. This concept is important in economic decision-making because it highlights the fallacy of allowing past expenditures to influence rational decision-making processes. For instance, if a company has spent a significant amount of money on a project that is now failing, that investment should not affect the company's decision regarding whether to continue throwing good money after bad or to cut its losses.

Understanding sunk costs helps individuals and organizations focus on future costs and benefits rather than being influenced by irrecoverable past costs. This leads to better decision-making, as parties can make choices based on marginal costs and benefits without the bias of previous expenditures clouding their judgment.