Some persons think, wrongly, that a business has a duty to maximize profits by selling goods and services for the maximum amount possible. In fact, this is wrong. You see, in microeconomics there is such a thing as elasticity of demand. In many product markets the price charged has a significant effect of the demand curve, that is, when the price charged becomes too high, most people stop buying the product. Also, it is also often true that when the price charged for a product is lower, many more people will buy the product. When more people buy the product at a lower price, this is called economies of scale. Also, when more goods or products are manufactured and sold, the cost of production for each individual product decreases. This is another example of economies of scale. For now, let us consider the situation where economy of scales developes from a lower price being charged for the product in the retail market.
Monthly Sales 1,000 Widgets at $100 each,
Model A for gross monthly income on sales of $100,000
Monthly Sales 5,000 Widgets at $80 each,
Model B for gross monthly income on sales of $400,000
As you can see, under Model A, each Widget is sold for the higher price of $100 each, with gross sales of $100,000, while under Model B, each Widget is sold for the lower price of $80 per Widget, with gross $400,000. Thus it is clear that in the situation above, which may be very common in the real world, the business makes $300,000 more a month by selling each Widget for the lower price of of $80 a Widget rather than the higher price of $100 per Widget. This proves that in many instances it is quite possible that a business will make much more money by charging a lower price per product when economies of scale with an elastic demand curve are involved.
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