I read somewhere recently, I think it was an article by William F. Buckley, on the trouble the airline industry is currently in, and he mentioned the “marginal consumer”. I understand that at a certain point, it doesn’t really cost that much more per passenger once you exceed a certain number. However, the example he used in explaining marginal consumerism was intriguing. Sensational for demonstrative purposes for sure, but interesting nonetheless. The model was that, if, say, Ford Motor Company sold 80 million (or so) cars a year, they’d lose alot of money. If they were to sell 80 million (or so) and one cars, bowever, they’d make millions of dollars. Again, I realize that this is an exaggerated example, but I don’t understand how you could go from losing vast amounts of money,or even break-even, to the other extreme, of huge profits, from such an relatively insignificant increase in sales.
Thank you in advance for your assistance.
The piece to which you refer can be found here:
http://www.nationalreview.com/buckley/buckley111301.shtml
Quoth Buckley:
His point, I believe, is that airlines are high fixed cost, low marginal cost enterprises. An airline’s expenses remain relatively stable regardless of its number of passengers. Thus, a small change in the number of flyers can mean the difference between profit and loss.
thanks for your input, and the link to the article. I do understand the part about the fixed cost, and once that’s met, everything else is gravy. I guess the problem I have is with his automobile example. Say at the 80 million mark they break even. How, then, at 80 million and one, can they go from debt or break-even, to million-dollar profits? The eighty-millionth-and-first car would only bring profit of tens of thousands of dollars, if that much. Forgive me if I am missing (or overcomplicating) a very simple point.
If you plot a curve of price/demand, you’ll find that at an extremely high price you have no demand, and at lower prices demand increases. That means that for any given price there are some people who would have paid much more, and some peopel that wouldn’t have bought even if the price were much lower. Along THAT curve, there will always be someone who would buy the product if it were even slightly cheaper, and someone who did buy but wouldn’t if the price were even slighly more. These are the ‘marginal consumers’, and they are the ones who will affect sales if the price changes.
The same applies to any other demand curve. That’s the argument around minimum wage laws, for example. Increase the price of labor, and you will always drive the marginal employees out of the labor market. The question is how many there are, and whether the gains for the other people outweigh the job losses.
BBBB: I think your confusion lies in the fact that your model doesn’t work. If a car company sells exactly enough cars to break even, such that total revenue is exactly equal to total costs (including opportunity costs, but it probably is best not to get into that) then if they sell one more car, the absolute upper limit of profits is equal to the cost of the car, which would hold if marginal variable costs are equal to zero. There isn’t any way around this, and anyone who says different isn’t thinking it through properly.
As mentioned, marginal consumers are especially important in industries where fixed costs are high relative to variable costs (such as the airline industry). Here’s an extreme example that actually can work:
A person has a webpage that is for all intents is free to them, regardless of how many people view it. They decide to hire an expensive porn star for a photo shoot, who demands $100,000 for her troubles. If the owner sells 10,000 member subscriptions for $10, then he breaks even. If he then entices, say, 500 more people to subscribe, maybe by giving them a 50% off reduction in price, then he makes a tidy $2,500 profit on the whole deal (this is ignoring opportunity costs, of course).
This is essentially the problem airlines are facing, except they have slightly less porn star related expenses.
In other words, although Buckley’s basic point is correct, his example is absurd. After the point at which the car company breaks even, the next customer doesn’t get them a million dollars of profit but at most profit equal to the price of the car. (And that assumes that making and selling one more car costs them nothing, which is clearly wrong.) If Buckley’s idea of explaining things always involves using confused, overstated examples, I would say that he’s not worth reading.
I think that what it really comes down to is that economists, in general, don’t understand math, as shown by their insistence on using the term “marginal” when the perfectly fine term “derivitive” already exists. (Okay, maybe they’re trying to emphasize the discrete nature of the variable. Right.)
“Again, I realize that this is an exaggerated example, but I don’t understand how you could go from losing vast amounts of money,or even break-even, to the other extreme, of huge profits, from such an relatively insignificant increase in sales.”
Well, I guess that if they’re selling the cars for a billion dollars each, they can (although that would mean that they have several quadrillion dollars of overhead 
). But I think that the simplist explanation is the word “exaggeration” that you mentioned.
The Ryan: Or it could just be that you don’t understand economics. Talking about ‘marginal’ consumers makes absolute sense.
Of course nothing could be further from the truth. And, of course, marginal is a perfectly acceptable term, considering it predates the use of Mathematics in economics. Marginal is absolutely the correct term, because it is not a mathematical concept, although it does have a “synonym” in the language of math (although it is exact) called the derivitive.