>> Can you show a concrete example of a business turning down $99 because it can't get the $100 needed to make a profit and as a result take a $100 loss instead of a $10 loss.
Based on your question I do not believe you can understand the answer. However, I will try.
The easiest example is hotels. If you go to a website like hotels.com you can find rooms in hotels that are virtually empty on some nights. Yet, they aren't offered at $10 and probably not even at $20. Why not? In my town, the cheapest, crappiest hotel I know of can be rented for $39. Yet, probably on 3-4 rooms are rented tonight. As you know, the price set by hotels.com is determined by the facility's owner. Why would they not rent the other 40 or so rooms for $20 for the night if they could?
The answer, of course, is that it costs more than $20 to clean the room. And in fact, the variable expense of cleaning room is the minimum price any hotel can sensibly charge for a room. It takes 30-45 minutes of labor to properly clean a room, plus the time for laundry, cost of cleaning supplies, coffee for the coffee maker, etc.
Were you to take a course in microeconomics, on the first day your professor would say to you: "If you don't get anything else out of this course, you must remember this: MC=MR. Marginal Cost = Marginal Revenue. That's where you operate."
The reason for this is that profits are ALWAYS maximized by operating at that level of output where the marginal cost of production is equal to the marginal revenue from selling that item (less disposition costs). As long as MR-MC > 0, you want to sell it because that will maximize profits of the firm. The same is true of drug manufacturers, who sell the latest pills for $10 in the US while selling the same product in some other country for $1. It is a safe bet the marginal cost of producing the drug is about 99 cents.
So, you see concrete examples on a daily basis. |
