Many students wonder, however, if the same logic applies when firms are
producing movies or computer software or smartphone apps or digital
versions of books, magazines, or newspapers. Applying Economic Concepts
7-3 examines the cost curves for products that have high one-time
development costs but extremely low marginal costs.
Applying Economic Concepts 7-3
The Digital World: When Diminishing Returns Disappear
Altogether
Many digital products have large initial costs associated with
their creation and development, but near-zero costs associated
with their unit-by-unit sales to customers. For example, a
blockbuster movie may cost hundreds of millions of dollars to
produce, but the cost of streaming that movie over Netflix is
close to zero. The cost of developing an electronic game may
also be very high, but once it is available for download on the
firm’s website, the cost of selling an additional unit is
approximately zero. The same is true for all computer software,
apps, and a whole range of digital products where the sale of
an additional copy involves extremely low marginal costs.
In these situations, the firm’s cost curves can still be drawn,
but the key difference is that the law of diminishing marginal
returns does not apply: The MC curve is at the same very low
value for all units of output. But if every additional unit (beyond