Thursday, February 3, 2011

Sunk Costs, Marginal Costs and Economics

When I was in college, I hated Economics. Then, several years later, I found myself teaching undergrad Econ and learned an appreciation for it. Now today, I have an even bigger appreciation for it. I have also noticed that not enough people have a solid grasp of some basic econ concepts that can be applied to everyday life. Two of these are cost related. Here are some basic definitions from The Economist website:

Sunk Costs - When what is done cannot be undone. Sunk costs are costs that have been incurred and cannot be reversed, for example, spending on ADVERTISING or researching a product idea. They can be a barrier to entry. If potential entrants would have to incur similar costs, which would not be recoverable if the entry failed, they may be scared off.

Marginal Costs - The difference made by one extra unit of something. Marginal revenue is the extra revenue earned by selling one more unit of something. The marginal cost (or whatever) can be very different from the AVERAGE cost (or whatever), which simply divides total costs (or whatever) by the total number of units produced (or whatever). A common finding in MICROECONOMICS is that small incremental changes can matter enormously. In general, thinking “at the margin” often leads to better economic decision making than thinking about the averages.

You have lots of sunk costs around you. For associations, your AMS is a big one. Do you keep throwing money at it because you "want to get the most out of your investment?" Don't. It is a sunk cost. See where that money you might spend would be more effective.

Marginal costs rarely get a second thought. Are you producing a webinar? The marginal cost of more attendees is probably zero! So use it as an extra value add for members who may not attend an in person meeting, or a sponsor or exhibitor.

Brushing up on econ is always a good idea. :)