chapter  II
Deferred Marginal Cost: An Explanation for High Estimated Markups
Pages 58

Marginal cost is the cost of the additional inputs, such as labor and capital, required to produce an additional unit of good or service. If the question is how to measure this concept empirically using time series data, an intuitive answer would be to divide each period's change in output by that period's change in inputs, adjusting for the effects of exogenous productivity growth. I argue in this chapter that such a calculation gives misleading results, because it ignores the role of labor effort, which businesses can use to postpone marginal cost. Businesses desire to postpone marginal cost in order to reduce the adjustment costs associated with changing the number of workers.