Every AI interaction has a cost. Understanding the economics of AI systems transforms you from a casual user into a strategic operator who can:
The difference between a $50/month AI budget and a $5,000/month budget often isn't the work being done—it's how intelligently the work is structured.
Why tokens matter:
Different AI capabilities have dramatically different costs:
| Capability | Relative Cost | Example Use |
|---|---|---|
| Text generation (small model) | $ | Quick summaries, simple Q&A |
| Text generation (large model) | $$ | Complex reasoning, nuanced writing |
| Code generation | $$$ | Software development, debugging |
| Image generation | $$$$ | Visual content creation |
| Video generation | $$$$$ | Marketing materials, demos |
Key insight: Larger context windows cost more per interaction but enable:
Even with unlimited budget, you'll hit rate limits:
| Limit Type | What It Controls | Business Impact |
|---|---|---|
| Requests per minute (RPM) | How often you can call the API | Affects real-time applications |
| Tokens per minute (TPM) | Total throughput | Affects batch processing speed |
| Tokens per day (TPD) | Daily capacity | Affects large-scale operations |
Pro tip: Higher-tier API plans have higher rate limits, not just lower costs.
A token is the fundamental unit AI models use to process text. In English, one token roughly equals:
Examples:
The context window is the total amount of text (measured in tokens) that an AI can "see" at once—including your prompt AND its response.
Think of it like RAM for a conversation:
| Strategy | Savings | Trade-off |
|---|---|---|
| Use smaller models for simple tasks | 50-90% | May miss nuance |
| Batch similar requests | 20-40% | Increased latency |
| Cache common responses | 30-70% | Staleness risk |
| Truncate unnecessary context | 10-30% | May lose relevant info |
| Use structured output formats | 15-25% | Less natural language |
You want to analyze customer feedback. You have:
Calculate:
Hint:
In Module 1.2: Context and Memory, you'll learn how AI systems manage information across conversations—and why "memory" is both powerful and limited.
You've reached the end of this module. Review the checklist below to ensure you've understood the key concepts.