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To: econjack

Marginal pricing is a long-term phenomenon that happens after the original entrepreneur has made “above-average” profits for a period of time, before that profit is competed away. That service will not be profitable anymore, but you can bet that the entrepreneur will then invent some add-on product that will make some more “above-average” profit, and the cycle continues. Nobody will stay in business for too long if they make no money above marginal cost, simply because of the opportunity cost of their time employed in a more profitable endeavor.


6 posted on 05/05/2008 9:40:57 AM PDT by winner3000
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To: winner3000
IMHO, your analysis is right on.

Marginal pricing most often comes into play when a business is declining, or on the verge of bankruptcy. It also factors big in the mining, and oil & gas industries. When deciding whether to begin production, the developers have to consider the long-run average cost — with a good profit margin factored in. Once all the capital costs become sunk costs — future decisions about whether or not to continue production pivot around the marginal costs of production, compared to marginal revenue.

Clearly, Anderson is playing to the Starbucks and cocktail party crowd. He has a knack for making dry as dust economics sound quite cool — but, in so doing, he does oversimplify. You could quote Anderson at a coctail party & be considered trendy -- if you go deeper, eyes begin to glaze over.

15 posted on 05/05/2008 10:02:53 AM PDT by USFRIENDINVICTORIA
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To: winner3000
Standard economic analysis embeds what is called a “normal rate of return” in the cost. This is usually understood to be the long run cost of capital (e.g., historically around 3.2% in the US). Any return above that, where price is above average total cost, is called an “economic rent”. It's called that because the return is “over and above what is necessary to keep those resources in their current use”. It is those economic rents that disappear in competitive industries. However, even if those economic rents go to zero because of competition, the resources may stay in their current use if there are no other alternatives that yield economic rents.

To say the Internet is free, however, is absurd. When Al Gore said he “invented” the Internet, what he really means is that he created the tax that appears on your phone bill ever month. Clearly, it is not free.

19 posted on 05/05/2008 10:51:29 AM PDT by econjack (Some people are as dumb as soup.)
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