If they decided to build a car the way they build a house, you know, a whole bunch of crafts people come to your front yard and piece by piece as they arrive, people figure out how to assemble them, cutting things to fit until finally there's a car.

If we built a car that way, you know, the way we built a house, it would cost more than $2 million to build a typical car. Why is that?

Because cars are built with a factory. Factories are expensive and factories are efficient.

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Okay, that's pretty obvious. We don't build cars the way we build houses. We build houses in an extremely inefficient way.

Partly because they're really big. Partly because there's a history of them all being different from one another. And partly because there are systems in place that make it that building a house in a factory is logistically and bureaucratically difficult.

Okay, fine. But what about all the other stuff in our lives? How much does it cost to make a can of Budweiser beer or a topic I know a little bit more about?

How much does it cost to make a copy of my book the practice? Well, the first copy of the practice cost the publisher tens of thousands of dollars.

Because not only did they have to type set it, not only did they have to edit it, not only did they have to find a printing company, but the printer has a big press that uses lots and lots and lots of paper and has no ability whatsoever to print one book at a time.

It's a factory. The first book really or really expensive. The last book costs about a dollar 20 to print in hardcover. That's it. That's called the marginal cost. The marginal cost is what does it cost to make the last one?

Not counting setup. Not counting overhead. Not counting the factory. The last one. Just the pieces you needed to make the last one. How much did that cost?

And there's a reason we ask this question. We ask it because one of the fundamental laws of microeconomics is that in an ideal marketplace of which none really exist.

A provider who's got a factory should keep lowering her price bit by bit until the very last person is able to buy it at one penny above marginal cost.

Because even if you made a penny on that last one, it was still worth it to you because that penny can go to pay for your factory.

Now there are reasons this is fictional because the market talks to the market. And if someone finds out that you're buying a copy of my book for a dollar 25, they're not going to be happy that they trusted the bookstore and paid 18 or 19 dollars for it.

And so now we can start thinking about the choices that a provider makes when it comes to marginal cost. For example, most of the books that are going to be published in the future are not going to be printed the way Penguin Random House does it.

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