According to the textbooks, each firm expands output until the additional (or marginal) cost of producing one more unit equals the additional (or marginal) revenue earned from selling it. Beyond that point, costs supposedly rise faster than revenue because of “diminishing returns”. As more resources are used, productivity falls. The same logic is applied to individuals. We supposedly consume or work until the marginal benefit equals the marginal cost of effort. This “equilibrium on the margin” supposedly guarantees efficiency.
Reality
Real businesses rarely behave this way. In most modern industries, fixed costs, such as those of buildings, software, machinery, and intellectual property, dominate their cost structures, and once those costs are covered, the extra cost of each unit often falls rather than rises. For a tech company selling software downloads, the marginal cost of any sale is, in fact, as close to zero as makes no difference, but none is willing to sell at that price. Economies of scale, network effects, and increasing returns are the real forces shaping industrial structure.
Kno’ What, Mate?
For a century and an ‘alf now, no, really!, economists have been ignorant of fixed and marginal costs. No, ‘s’ true!
Reality here is that Spud’s been listening to Steve Keen without grasping enough economics himself to work out why Keen’s a loon.
He’s presuming an infinite market, isn’t he? He’s ignored marginal utility to the consumer. As production rises marginal utility falls. If you have one pair of shoes a second pair has less value than the first pair. Sure you can sell software at virtually no cost. But if you saturate the market, you can’t sell any more at any price.
“In most modern industries, fixed costs, such as those of buildings, software, machinery, and intellectual property, dominate their cost structures, and once those costs are covered, the extra cost of each unit often falls rather than rises. For a tech company selling software downloads, the marginal cost of any sale is, in fact, as close to zero as makes no difference, but none is willing to sell at that price.”
So how would that work out? Adobe hit x numbers of sales of Photoshop and start selling it for a quid a month? Why would anyone pay for the full priced Photoshop instead of cancelling their subscription and taking one of the quid a month ones?
And why would Adobe give it away when people are willing to pay £30/month?
“Economies of scale, network effects, and increasing returns are the real forces shaping industrial structure.”
Economies of scale are a bloody good thing. Honda, Marvel, Tesco mean we all get good things. You get to watch $300m spectacle because it’s divided between 50-100m people who bought a £10 ticket. A ticket to the theatre will cost you £30+ and you don’t get something as spectacular as Avengers Endgame. Which is why it’s a dying artform.
I didn’t realise Adobe were now selling PS as a “service”. But I can imaging why. I’m still using PS6 built for W98 & installed in compatibility mode. Does all I could possibly want & at least I know it. Adobe will get no more money out of me.
I’m still using PaintShop4. It does everythign I need it to do. The only annoyance is that it tries to write to HKEY_Machine instead of HKEY_User, so errors on startup if you’re not Admin, but I just need to click through that.
Yeah, software built before the era of UAC.
Try Paint.net (getpaint.net). It’s a freebie from Microsoft that I use for basic picture editing.
If you’ve got a Mac, the free Photos app included with the OS is a perfectly capable photo editor, which (like Lightroom rathe than Photoshop) doesn’t actually destroy the original image, which remains available. And the new Affinity Studio is free and does a lot more…
I don’t pay for anything Adobe, but I prefer subscriptions for the software I use a lot. It’s that you get updates and it’s easy budgeting and often a certain amount of cloud support thrown in.
…and software downloads are weird compared to pretty much everything else sold, in that yes the marginal cost is pretty close to zero.
I also note that for industries where fixed costs dominate, they tend to be ones where the largest fixed cost is cost of complying with all the regulations imposed by the curajous state. And so you end up with a few large companies, because they’re the ones who have the staff to ensure compliance.
There are suchthings as marketing costs where the additional cost to generate an additional sale tends to rise – rather than fall – after some level of sales *even for software*.
It seems that there is no limit to Murphy’s ignorance
Right John. It’s that marginal utility to the consumer thing. The more you sell the lower the MU to those haven’t bought it. Or they would have already bought it. So you need more advertising.
Thanks – that expresses it better than I did
When Gamecock was in school, we were taught to use pricing to balance between margins and volume.
Murphy’s ‘textbook’ method seems strange.
Murphy’s textbooks are in the same category as the journalists who keep calling him: Imaginary props to help for his straw men.
I like to think that the fictional characters argue with him. “I may be imaginary, but have you ever considered you’re turning out nonsense every day.”
Does he think software sells at fixed intervals with no change? Because if it costs you a hundredth of a cent per second to maintain the CDS that is fine when you’re selling several thousand an hour, not so much at the tail end when you might be several thousand hours between sales.
Hence why Steam can afford to do it but individuals can not – economies of scale and the smaller producer hits the profit wall far, far, sooner than the large one.
so, comment sworking?
Yep. But 2 days posts disappeared.
Was getting 404s all morning when trying to comment, now all the posts themsleves have gone.
I think it’s generally felt you have a banana problem. Either failure to supply or oversupply. The root of the problem’s up in the branches.
Let’s call it what it really is. He got kicked out of academia when the real academics, who may not be great but did get their qualifications and did do the necessary hard years to get their jobs, eventually had had enough of him talking complete and utter shit to kids and making a mockery of them.
Delusional narcissist that he is, he’s dead angry about this. And it doesn’t help that his two unemployable kids are back home and mummy’s offering the teat again. So he decides that everyone else is part of a conspiracy or just doesn’t see what he sees. And he writes mad pieces railing against two centuries or so of developing thought.