Why Is Marginal Cost Important?
Though all companies have to generate enough revenue to cover full costs and a profit margin, once this level is achieved, marginal costing is important to assist in the ability to supply additional profit. A common example is in the airline industry. Once a plane is in the air, the additional cost to fill one more seat is fairly small. It is advantageous to sell any remaining unfilled seats at any price above marginal cost. Hotels rooms and cruises work in a similar fashion. It is one reason hotels can offer deals to websites like Priceline or Hotwire. Selling rooms at a discount is only viable after overhead costs are covered, and only at rates higher than marginal cost. Knowing how companies work gives the consumer an advantage in negotiating lower prices, whether it is for a berth on a cruise ship or the last seat on an airplane.
