Marginal Cost and Marginal Revenue Term Paper

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[Profit in Real Firms]

Today airlines use the Fleet Assignment Model which assigns aircraft types to an airline timetable in order to generate maximum profits. This is similar to what Continental Airlines practiced and is based on the principles of maximizing profits by calculating marginal revenue and marginal cost. The Fleet Assignment Models have increased profit margins which are constraint to factors such as that each flight in the schedule has to be assigned a particular type of aircraft. The assignment is such that the number of aircrafts cannot exceed the number available in the fleet.

Profit Maximization through the comparison of cost and revenue is now being widely practiced due to its effectiveness in fulfilling the desired goal. Firms and businesses tend to keep records of the cost and revenues in order to study the comparison of the two. The Inland Press Association has been keeping data regarding cost and revenue since 1919 so that participants can compare their performance with the financial performance of other competitors. [William B. Blankenburg]

A cable provider also uses the same method to determine maximum profits. He keeps on adding channels until his marginal revenue equals the marginal cost. The operator might choose to leave a channel unused and only program that many channels which are economically feasible. Increased maintenance, operative and administrative costs along with the payment for the networks would be the factors that add up to the marginal cost of adding a new channel. With these increased costs, the clientage of the cable provider adds to the marginal revenue. However another factor that will add up to the revenue would be the local advertisement. As advertisement would also add to the revenues generated by a cable operator, therefore it may become a positive factor in increasing the marginal revenue of adding a channel. "Dertouzos and Wildman (1993) emphasized that the cost of running a cable system constituted critical differences between markets, and that factors that accounted for the systematic difference between systems should be accommodated when studying cable.

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Among other factors include costs and revenues of the system influence local cable operation including programming decisions." [Eun-Mee Kim p.24]

A profit maximizing bank also compares its marginal revenue from the loan which it provides and marginal cost of raising deposits. Hence banks also keep a track of their marginal revenues and costs. Its primary business is giving loans. The marginal revenue of a bank would decrease with an additional loan as the number of loans extended keep on increasing. It then would need to generate funds through means which will give minimal rise to the marginal costs which would most probably be its local insured deposit market. It then continues to raise funds till the cost of obtaining additional insured deposits surpass the cost of raising funds through other means. To ensure lowest marginal costs it then changes its source of raising funds.

CONCLUSION

It is very important for any profit maximizing business whether at a large scale or a small scale, to equate its marginal revenue and costs. This form of profit maximization though is not the only way to maximize profits, is effective and used widely.

REFERENCES:

(1) Steven P. Cassou and John C. Hause - Article Title: Uniform Two-Part Tariffs and Below Marginal Cost Prices: Disneyland Revisited. Journal Title: Economic Inquiry. Volume: 37. Issue: 1. Publication Year: 1999.

(2) Profit in Real Firms [http://ingrimayne.saintjoe.edu/econ/MakeProfit/RealFirms.html] Accessed on 28/08/2005

(3) William B. Blankenburg - Article Title: Effects of Cost and Revenue Strategies on Newspaper Circulation. Journal Title: Journal of Media Economics. Volume: 7. Issue: 2. Publication Year: 1994.

(4) Eun-Mee Kim - Article Title: Determining the Number of Programming Options in Cable Television.….....

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