Chapter 7: By the Margin
Updated: Feb 26, 2019
Marginally speaking, it probably cost more to write this chapter than if I would have during January Induction Program. In other words, the marginal cost of writing a chapter has increased, as I have the opportunity to do many other things such as play LoL/Maple, or do my tutorial work. What is marginal cost? Marginal cost is the cost added by producing one extra item of a product; in this case, it would be the electricity bill of keeping the computer running for 3 hours when choosing to play 4 games of LoL.
Economists think by the margin. Therefore, instead of looking at the average cost and benefit, they look at marginal cost and benefit, comparing the value of one more unit of consumption to the marginal benefit of that extra unit. For example, there is a shop that sells Crystal hearts at about 1 billion each. The shopkeeper decides to give me an offer, either buy one for 1 billion mesos, or buy 2 for 1.5 billion mesos. Since I already had intended to buy a Crystal heart, it would at least give me 1 billion mesos worth of satisfaction, but what if I buy the second heart? Normally, people would think about the average price of the hearts, however, the marginal thinker would decide whether the extra 500 million mesos of marginal cost is higher or lower than the satisfaction he gets from getting a second heart. In my case, since I only require 1 heart, the second heart would be quite useless and thus the marginal satisfaction (utility) I derive from buying a second heart is less than the marginal cost, and thus I do not buy it.
On the other hand, marginal revenue the additional revenue generated from selling one more unit of your product. Let’s look at the shopkeeper’s viewpoint. By choosing to sell his second heart at 500m, it would mean that his marginal revenue from selling his second heart is 500m, and he would be making a loss if the cost of production of that heart is more than 500m.
Moving away from economics jargon and into Maplestory’s economy, I shall be explaining in depth about the angelic blessing production rush which occurred in mid-2012, and in the viewpoint of a merchant. When angelic blessing recipes were dropped as loots from monsters, many hackers went into these maps and mass farmed the recipes, selling them at a fixed price of 300 million mesos each. (The previous chapter’s explanation occurred about 3 months later when price dropped) Let’s say that I am an average merchant during that point of time and had lots of mesos to invest in angelic blessing recipes (At that point in time I was not that loaded, and thus did not participate very actively in this market opportunity). So I spend 3 billion buying 10 recipes, and I go to ardentmill to buy my materials (resources) that are necessary in the production of angelic blessings (Refer to recipe in chapter 6) As the materials costs about 20 million, the marginal cost of producing an angelic blessing is 320 million mesos, and the marginal revenue from selling an angelic blessing is 350 million mesos after tax. In order to decrease marginal cost in order to increase profit, I strike deals with the material supplier and the hackers, allowing them to clear their stock at a cheaper price, and both parties earn. After all the deals have been made and utilized to my utmost capabilities over a period of 2 days, the marginal cost of producing one angelic blessing dropped to 280 million. In this period of 2 days, I have entered economies of scale, where the marginal cost of producing an angelic blessing gradually declines.
However, after the second day, the cost price of the materials started to rise, as people who had stockpiled them before ran out of stock, and thus the supply of materials decreased. As I have mentioned earlier, with a decrease in quantity supplied, and a constant/rising demand, the equilibrium price will rise, and thus the marginal cost of producing an angelic blessing starts to rise back up. Conversely, as more angelic blessings enter the market, there will be a higher supply and lower demand due to the rush period being over, resulting in a lower equilibrium price and thus less marginal revenue per unit of angelic blessing sold. On the 4th day, the marginal cost of producing an angelic blessing would be higher than the marginal revenue, and that is when it is not worth it anymore to produce an additional unit of angelic blessing, as that would just result in a loss.
If that was confusing, here is a graph to explain each part. At Day 0, the cost of producing a unit is 320m, and at Day 2, it drops to 280m and at Day 4, it rises back up to 320m due to a decrease in supply. The marginal revenue curve/line is constantly decreasing as supply of Angelic blessings gradually increases, decreasing the equilibrium price of Angelic blessings. From the 3rd day onwards, the law of decreasing marginal returns kicks in hard, whereby the marginal cost gradually increases.
In order to maximize profits, one must continue production until marginal cost = marginal revenue, as any point before that intersection will result in a profit.
Previously I had mentioned about economies of scale and diseconomies of scale, so what do they mean? Entering economies of scale would mean that for every 1 input, I get more than 1 output, in other words, production becomes more efficient, and vice versa for diseconomies of scale. An example would be a photocopying shop that has 10 photocopiers and 5 workers. Presuming that each worker performs optimally when allocated to 1 photocopier, the marginal cost of producing each unit will decrease when more and more workers are hired, up to the 10th worker. Then onwards, the 11th worker would not be very beneficial as he does not have a machine to work with, and may end up disturbing the other workers, which isn’t very productive.
End of Chapter 7
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