How can AI prices be dropping to nothing and simultaneously exploding?

Hello all,

There’s a token paradox that baffles me.

Organisations are seeing an explosion in costs.

• Uber burnt its entire annual AI budget in just four months.

• At Nvidia, the cost of compute is more than the cost of employees

• Software startups are spending upwards of $10million on inference and LLM products

At the same time token costs are plummeting.

As someone who doesn’t have a background in economics, this seems like a paradox to me. If the underlying cost is going down, how come it’s blowing budgets?

I like to see this kind of thing visually, so I turned to Claude Code to visualise the paradox. It created this lovely app to let me tweak the results.

First, there is “Today’s reality” (according to Claude: 50% decline in token cost a year, 200% growth in usage):

That results in 7.6x higher costs in 5 years.

What if there is an “Agent Explosion”? (Usage up 600% a year, costs decline 30% a year). Then it gets really scary:

Notes

• This is a vibe-coded app built to help me see the paradox in my mind. There are a thousand caveats about this kind of model, but it helped me. I’m writing this post not to reveal some new insight in the world of economics but to show how genAI tools can assist with thinking processes by the rapid creation of learning tools. You can go play with the app yourself to see difference scenarios.

• If you’re reading widely on AI or are already an Economics expert, the paradox is not news to you.

• In researching this article, I also discovered Jarvon’s Paradox, a well known paradox similar to what’s happening with token cost and usage.

Have you used vibe-coding to help understand any concepts you’ve struggled with? Do let me know in the comments.

Before you leave:

• Do sign up for “Why we’re building Ridge AI” on my next episode of “The AI Analyst?” with Ellie Fields.

• Further ahead, it’s Chart Chat 72 on July 23rd. We’re all going to share some recent projects, along with the highs and lows of each. I’ll be sharing my Add To Playlist explorer (a work in progress you can see here)