Zero marginal cost refers to the production of an additional unit without an increase in total cost, often seen in nonrival goods like experiences or services. However, fixed costs and capacity limitations can affect marginal cost. The term is also used for goods with such a low marginal cost that it can be treated as zero, such as open seats on a passenger train or digital products.
Marginal cost is the term used in economics and business to refer to the increase in total production costs resulting from producing one additional unit of the item. Zero marginal cost describes a situation in which one additional unit can be produced without any increase in the total cost of production. Producing another unit of a good can have zero marginal cost when that good is nonrival, meaning that it is possible for one person to consume the good without diminishing the ability of others to consume it simultaneously.
Marginal cost is not the same as the average cost of a unit, because things like fixed costs and economies or diseconomies of scale mean that the marginal cost of each additional unit can change as the total quantity changes. For example, manufacturing a metal soda can in a factory requires only pennies of metal, so if a can factory is already operational and is not constantly running at full capacity, the marginal cost of an additional can it is very small. However, the marginal cost of the factory’s first can was enormous, because increasing the number of cans produced from zero to one required a large fixed cost that had to be paid to make can production possible. The initial fixed cost was the expense of building the factory in the first place, along with other expenses, such as the cost of finding and hiring enough workers to get the factory machinery up and running.
Thus, saying that one additional unit of some product can be produced at zero marginal cost is not the same as saying that the product overall can be produced for free. Most nonrival goods also have fixed costs that must be paid before they can be produced, even if there are no additional costs after that. Goods that can have additional units produced at zero marginal cost are not things that the person consuming them takes physical possession of, because that would make them rival. Instead, they are generally goods such as experiences, services, or events.
In many cases, goods can be produced at zero marginal cost only up to a certain capacity. For example, once a movie is shown in a movie theater, the marginal cost to the movie theater of having one more person see the movie is zero as long as the movie is not sold out, because the costs incurred by the theater for everyone. each time the movie runs is not affected by the number of people in the theater. The marginal cost of increasing the number of people who can see the movie remains zero until the theater is at full capacity, at which point the good becomes rival because it is no longer possible for an additional person to see the movie without displacing to someone who also wants to see it. This raises the marginal cost of the next ticket sold above zero, because increasing the number of people who can see the movie by one now would require the theater to hold additional showings of the movie or increase the number of seats in the theater. Once capacity has been increased in this way, the marginal cost of more units returns to zero until all capacity is replenished.
The term “zero marginal cost” is commonly used to refer to cases in which the marginal cost of producing the good is actually not quite zero, but is so close to it that units of the good can often be treated as if they were. For example, if a passenger train still has open seats, adding passengers to those seats will slightly increase the amount of fuel the train will consume to reach its destination, because their presence means more mass for the engine to move. However, the mass of an additional person is so small compared to that of the train that this cost is so small as to be irrelevant. Products that can be sold and distributed over the Internet, such as computer software or e-books, still require bandwidth and electricity for each copy, but the marginal cost of any individual copy is negligible.
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