Thursday, April 4, 2013

Increasing Cost and Decreasing Profits

Firm profitability is one of the topics I look at in the Prin. of Microeconomics course I teach.  Here is an example of how increases in input costs (and the firm unable to pass those costs on as higher prices) results in a decline in profits.  While that may seem obvious, what is much harder to determine is how much of a decline in profits will occur from the increase in costs.  Here is where elasticity of demand and supply (or marginal costs) helps answer this question, and as can be seen in the article, while the fuel costs are increasing - not all of that increase in cost is passed on in higher fuel surcharges (or higher prices).

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