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Finance allah shmoop what is marginal cost All right let's

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start with profits No different profits Gross operating net those

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kind of profits Those are the big three for now

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Anyway if you don't recall the income statement that gave

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you those margins well here it is in all its

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glory Our awesome lemonade stand So from a resource is

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allocation perspective margins drive everything you ever read Animal farm

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Well if you look in the very fine print you'll

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see that it really says high margins good higher margins

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better But margins are a contextual thing They're evaluated on

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a relative basis Basically the more of a commodity Something

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is generally speaking the more rivalrous the industry there in

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meaning tons and tons of sellers all competing on price

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for the same product and thus lower margins for that

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highly competitive industry Think about the very mature in declining

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paper in pulp industry long history tons of competitors They

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all sell the same old dead tree product There's almost

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no differentiation between one seller or another of paper and

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pulp And they're filled with unions Yeah way low margin

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world less and less demand for paper and paul peach

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Year is everything moves online Polluters mostly overseas have a

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structural advantage over non polluters because it's cheaper to make

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paper pulp when you could just pollute dump everything in

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the river right Well in the us where houser is

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the paper and pulp gorilla And in a great year

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this very commoditized company filled with union workers has only

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ten ish percent margins where houser sells a ton of

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pulp for some three grand or so which cost it

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just two grand and change to manufacture But then if

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you add in operating costs like shipping union pension funds

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senior management lawyers rent and more lawyers will even its

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scale that three grand of revenues from a ton of

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pulps sold cost warehouses something well over twenty five hundred

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bucks So that pretax they only make five hundred box

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or less from every three grand of revenues right that

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be their operating margin there Well compare warehouses with google's

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search business Google owns the world in the search category

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with over eighty percent of all searches going to its

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servers Essentially no riel competitors today Sorry microsoft Just keeping

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it real Google makes money by selling virtual real estate

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Or cliques and views a typical click on ah highly

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big keyword like taxes help or mesothelioma Ambulance chasing lawyers

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is something like fifty cents per click or more Well

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google's marginal cost for that click Well not a lot

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the electricity to serve the page but well that's about

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it Call it a penny So google search business alone

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is like a ninety percent plus gross margin kind of

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business Pretax They have almost no marginal cost of goods

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sold Really amazing business way different from twenty five hundred

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dollars to sell three grand worth of pulp Google has

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no cost of shipping and a small handful of highly

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paid engineers a call in a few hundred of them

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who actually matter to the process today Well they created

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a mathematical algorithm that truly scales meaning it gets bigger

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and more profitable The bigger it grows well the marginal

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additional cost of one more click to google is almost

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nothing and it's a vast contrast to that paper and

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pulp business where yet more forests have to be planted

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more lumberjacks need to be hired and then probably injured

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More trees need to be killed and shift and chemically

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altered with bleach and on and on and on so

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relative to its competitors wear hauser might be doing great

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with ten percent plus margins But the fact is the

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paper and pulp business is a lousy industry a lousy

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business when compared with the search industry Who's n plus

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one thor Additional units sold Cost google almost nothing The

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basic idea is that you have to understand margin in

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the context of an industry and in the context of

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an economic climate that could be good bad and or 00:04:09.298 --> [endTime] ugly

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