Law of Increasing Marginal Costs

Categories: Econ

See: The Law of Diminishing Marginal Returns. This is the flipside (same thing) of the law of increasing marginal costs.

The law of increasing marginal costs says that, as more and more of something is consumed, marginal costs increase over the short-run.

While the law of diminishing marginal returns looks at this concept through the lens of marginal benefits, the law of increasing marginal costs looks through the lens of marginal costs. Since marginal costs and marginal benefits are related, these terms are two sides of the same coin.

Imagine consuming some delicious orange juice. As you drink more and more of it, each sip is less exciting (decreasing marginal benefit), yet the dollar cost of each sip is the same. You’re getting less enjoyment from each additional sip of orange juice with a constant dollar cost per sip, which means your marginal costs are going up with each sip, too.

Yep, only the most dismal of the sciences would ruin OJ for you.

Related or Semi-related Video

Finance: What is marginal cost?41 Views

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Finance allah shmoop what is marginal cost All right let's

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start with profits No different profits Gross operating net those

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kind of profits Those are the big three for now

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Anyway if you don't recall the income statement that gave

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you those margins well here it is in all its

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glory Our awesome lemonade stand So from a resource is

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allocation perspective margins drive everything you ever read Animal farm

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Well if you look in the very fine print you'll

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see that it really says high margins good higher margins

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better But margins are a contextual thing They're evaluated on

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a relative basis Basically the more of a commodity Something

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is generally speaking the more rivalrous the industry there in

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meaning tons and tons of sellers all competing on price

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for the same product and thus lower margins for that

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highly competitive industry Think about the very mature in declining

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paper in pulp industry long history tons of competitors They

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all sell the same old dead tree product There's almost

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no differentiation between one seller or another of paper and

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pulp And they're filled with unions Yeah way low margin

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world less and less demand for paper and paul peach

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Year is everything moves online Polluters mostly overseas have a

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structural advantage over non polluters because it's cheaper to make

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paper pulp when you could just pollute dump everything in

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the river right Well in the us where houser is

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the paper and pulp gorilla And in a great year

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this very commoditized company filled with union workers has only

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ten ish percent margins where houser sells a ton of

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pulp for some three grand or so which cost it

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just two grand and change to manufacture But then if

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you add in operating costs like shipping union pension funds

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senior management lawyers rent and more lawyers will even its

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scale that three grand of revenues from a ton of

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pulps sold cost warehouses something well over twenty five hundred

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bucks So that pretax they only make five hundred box

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or less from every three grand of revenues right that

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be their operating margin there Well compare warehouses with google's

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search business Google owns the world in the search category

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with over eighty percent of all searches going to its

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servers Essentially no riel competitors today Sorry microsoft Just keeping

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it real Google makes money by selling virtual real estate

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Or cliques and views a typical click on ah highly

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big keyword like taxes help or mesothelioma Ambulance chasing lawyers

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is something like fifty cents per click or more Well

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google's marginal cost for that click Well not a lot

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the electricity to serve the page but well that's about

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it Call it a penny So google search business alone

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is like a ninety percent plus gross margin kind of

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business Pretax They have almost no marginal cost of goods

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sold Really amazing business way different from twenty five hundred

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dollars to sell three grand worth of pulp Google has

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no cost of shipping and a small handful of highly

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paid engineers a call in a few hundred of them

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who actually matter to the process today Well they created

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a mathematical algorithm that truly scales meaning it gets bigger

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and more profitable The bigger it grows well the marginal

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additional cost of one more click to google is almost

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nothing and it's a vast contrast to that paper and

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pulp business where yet more forests have to be planted

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more lumberjacks need to be hired and then probably injured

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More trees need to be killed and shift and chemically

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altered with bleach and on and on and on so

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relative to its competitors wear hauser might be doing great

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with ten percent plus margins But the fact is the

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paper and pulp business is a lousy industry a lousy

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business when compared with the search industry Who's n plus

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one thor Additional units sold Cost google almost nothing The

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basic idea is that you have to understand margin in

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the context of an industry and in the context of

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an economic climate that could be good bad and or 00:04:09.298 --> [endTime] ugly

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