Archive for the ‘Marginal Costing’ Category

The economics of oil … continued.

April 1, 2016

A couple of week’s ago, I posted The economics of oil …  suggesting that countries such as Saudi Arabia were operating below breakeven with oil @ $40 per barrel.

 

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While technically correct, several loyal readers schooled me on the difference between “economic breakeven” and “fiscal breakeven”.

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The incremental cost of that 51st employee …

August 30, 2012

Of course, I’ve been thinking about entrepreneurs and small businesses recently.

And, the obvious suddenly became evident to me: Under ObamaCare, the incremental cost of a small company’s 51st employee is ENORMOUS.

Think restaurants … paying a bunch of workers minimum wage with few or no benefits.

Today, employee #51 costs the business about $20,000 annually (2,000 hours @ $10 per hour).

Under ObamaCare, that added bus boy costs $122,000 … his $20,000 plus the $2,000 per employee tax penalty on the business for not giving employees health insurance.

That’s a lot money for a bus boy.

Guess employees #1 to #50 are just going to have to work harder.

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Not everyone can be the marginal cost consumer…

September 30, 2011

Punch line: Netflix got into a hole by initially giving away its video streaming offerings … in essence, pricing based on marginal cost.

That can work, when everybody isn’t a marginal customer …

Excerpted from The Atlantic by Megan McArdle:
The Qwikster and the Dead

Netflix tried to build their streaming video service by giving it away for free, as an add-on to their snail-mail service. 

This was a good way to add customers.  But the history of the internet indicates that once you convince people something is supposed to be free, or close to it, you will have a devilishly hard time getting them to pay for it. 

People decided that they were supposed to be able to stream unlimited movies for free.

This never made any sense; people were confusing the marginal cost with the average cost. 

You can always get a sweet deal if you are the customer who gets marginal cost pricing

Medicare does this — reimburses hospitals at above their marginal cost, but below their average cost, so that private insurers have to pick up most of the hospital overhead. 

European countries do this with prescription drugs: reimburse above the marginal cost of producing the pills, but below the total cost of developing the pills, so that the US has to pick up most of the tab for drug development.

The problem is that as voters and as customers, we often get the notion that marginal costing can be extrapolated to everyone. 

So liberal policy wonks want to save money by putting everyone on Medicare, or some equivalent program that uses the government’s monopsony pricing power to get lower prices for everyone.

But, it doesn’t work that way.

Everyone cannot be the marginal cost consumer. 

Someone has to cover things like overhead and development costs. 

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