Tuesday, March 27, 2012

Rising Input Prices and Profits

In Principles of Microeconomics we discuss the effect that changes in marginal cost have on the firms profit maximizing output, price and profits. Here is an example of an increase in raw material (input) prices and how it is affecting the firms pricing decisions and their bottom line. The Financial Times reported in 2011 that ConAgra reported rising raw material prices were reducing the firms profits in part due to the higher than expected prices and ConAgra's inability to pass on the rising raw material costs in the form of higher prices.

As microeconomic theory predicts, when consumers are price sensitive - as seems to be the case here - firms will have a greater difficulty passing on rising marginal costs, and thus the higher unit variable costs and lower prices increases result in a decline in profitability.

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