Changes

'''''Question''''':  why doesn't a supplier repeatedly increase the price of his good or service to make more money?

'''''Question''''':  why doesn't a supplier repeatedly increase the price of his good or service to make more money?

The suppliers of goods and services would like to increase their prices so that they can make more money.  So why don't companies repeatedly increase their prices so that they can make more money?  For example, why doesn't Shop-Rite increase its price for milk and eggs by 10% every year, or even every month?

The suppliers of goods and services would like to increase their prices so that they can make more money.  So why don't companies repeatedly increase their prices so that they can make more money?  For example, why doesn't Shop-Rite increase its price for milk and eggs by 10% every month?

Imagine yourself as president of a company that makes "widgets" (a "widget" is a term in economics for an imaginary good), and you are having a meeting to discuss your product.  Inevitably an employee suggests increasing the price on the widget so that the company will make more money.  People who have never studied economics think that increasing the price will always result in increased revenue from sales, because revenue is price times quantity sold.  If the quantity sold is constant, then increasing the price should have the effect of increasing the revenue from sales.

Imagine yourself as president of a company that makes "widgets" (a "widget" is a term in economics for an imaginary good), and you are having a meeting to discuss your product.  Inevitably an employee suggests increasing the price on the widget so that the company will make more money.  People who have never studied economics think that increasing the price will always result in increased revenue from sales, because revenue is price times quantity sold.  If the quantity sold is constant, then increasing the price should have the effect of increasing the revenue from sales, right?

But suppose you have an employee who had taken this economics course.  He or she points out that an increase in price will reduce the demand, because of the Law of Demand:  demand decreases when price increases.  You will sell fewer goods if you raise the price:  your "quantity sold" will decrease if you increase your price.  Your overall revenue is price times quantity, and a decrease in quantity sold may cause your overall revenue to decrease also.

But suppose you have an employee who had taken this economics course.  He or she points out that an increase in price will reduce the demand, because of the Law of Demand:  the quantity demanded by the public will decrease when the price increases.  You will sell fewer goods if you raise the price:  your "quantity sold" will decrease if you increase your price.  Your overall revenue is price times quantity (PxQ), and a decrease in quantity sold may cause your overall revenue (PxQ) to decrease also.  Think of what happens to the sales of candy bars if their price is increased to $5 per candy bar.  Most people do not want to buy them anymore.

As owner, you then ask, “how much fewer sales will result if I increase the price?”  If the quantity sold decreases by a smaller percentage than the price increases, then overall revenue (price times quantity sold) will increase.  If, however, the quantity sold decreases by a larger percentage than the price increases, then overall revenue will decline.  As owner, you do not want a decrease in overall revenue, and increasing the price may cause you to have less revenue.

As owner, you then ask, “how much fewer sales will result if I increase the price?”  If the quantity sold decreases by a smaller percentage than the price increases, then overall revenue (price times quantity sold) will increase.  If, however, the quantity sold decreases by a larger percentage than the price increases, then overall revenue will decline.  As owner, what matters most to you is what happens to "P times Q" as you change the price.

==Price Elasticity of Demand==

==Price Elasticity of Demand==