Wednesday, 20 January 2010

It's the margin that matters

Dave Prychitko writes at the Economic Way of Thinking blog:
About twenty years ago I needed to fax to my publisher a copy of my signed book contract, or something like that. There was not a single fax machine on the SUNY-Oswego campus where I taught. It was 4:50 and the fax needed to be sent before 5:00pm.

I raced to the sole fax service provider in town, a small office supply shop. He charged two bucks. I opened my wallet and discovered that I only had a dollar. (To this day I rarely have more than five bucks in my wallet.) I asked him if he'd please fax it for a buck. He flat out refused my offer. "I have my overhead to consider."

The shopkeeper obviously didn't know he was dealing with an economist. "No, you really don't have overhead to consider. You face the same overhead expense whether or not you fax my paper. It will cost you no more than fifty cents for the phone call. Period. I give you a buck and you can make fifty cents that you can allocate to your overhead or anything else for that matter. If you keep insisting upon two bucks, you receive nothing for your overhead expenses. You lose. You don't make a penny."

He accepted my offer. I don't know if he bought my marginal cost / marginal revenue argument, or if he just wanted me out of his store. In either case, it's the margin that mattered.
Advice, don't confuse fixed and marginal costs.

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