The basis for this theory is that, when the sellers are asked as to how they arrive at the prices that they fix in order to sell their products, there was one answer that came from many. It was the markups. They also call it as the profit margins.
There are a lot of ways in which a firm can raise its profits. This can be done by making the marginal cost to be equal to the marginal benefit. But in these days, there are many of the business men who are trying to find out the marginal costs and the marginal benefits, and then they are trying to do the comparison between those two.
There is a real case that had happened in the 1960s. There was a firm that had used the concept of the marginal benefit. They were found to be very much in benefit due to it. There were the continental airlines that had decided things based on the extra costs of the flight considering the revenues that it could possibly make.
They decided upon which are the lights that they would fly based on this analysis of theirs. There were the other airlines that were deciding things based on the percentage of occupancy seen by the flights. This made a huge difference to them.
The economists view:
There is a theory which has been constructed by the economists in this regard. They decided to do this based on the firms that used the markup cover costs in order to decide the prices that they would set for the consumers. The basis for this theory is that, when the sellers are asked as to how they arrive at the prices that they fix in order to sell their products, there was one answer that came from many. It was the markups. They also call it as the profit margins.
The difficult part of this theory lies when the percentage of the markup is tried to be found. In the case of the grocery stores, there are different percentages used to markup for each of the product. They on an average have a markup that is very less than that in the case of a furniture store.
The economists consider this rule of markup to be the thumb rule to many things. They consider this to be a way in which the firms would be able to conduct their affairs. Since the firms do not have ways to find out the marginal costs and the revenues, they stick to the other ways or guidelines possible to them to perform in a satisfactory manner.