Thinking about Marginal Costs

Marginal cost is a term that you learn while studying economics. It is the additional cost to make one extra thing. We tend to think of these costs as fixed, but in fact, they vary. Marginal costs may go up when as we produce more, we run into supply shortages or if our capacity is near or at its limit. Marginal costs may go down if we can enjoy economies of scale. And btw, declining marginal costs have played a huge role in enabling mass production to solidify the US middle class in the 20th century.

But technology has introduced a new idea – that is the idea of zero marginal cost. In certain cases, it costs nothing to produce one more thing. Like an e book. We are still getting used to this idea. And because we are still getting used to it, we find the results of zero marginal cost to be unbelievable. But as Al Wenger points out in an interesting video, those results are clear. As we discover more areas where there are zero marginal costs, we will experience more abundance. Check out his presentation — it is very thought provoking.

And consider one thing more. Bargaining makes sense only when we are in a zero sum game. If Al is right, our business models that rely on tough bargaining will need to be altered.

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