Friday, October 15, 2010

Finding The Right Is Not Always Easy, Even For Wal-Mart

See Walmart Rolls Back Rollbacks: Food Prices at Two-Year High.

One thing I usually say when I lecture on supply and demand is that firms can set the wrong price, at least temporarily. If running a business were easy, we would all be millionaires running our own business. Many decisions have to be made, including deciding what price to charge.

As the article discusses, Wal-Mart recently cut prices quite a bit on some items yet same store sales fell. This sounds like their total revenue (TR) fell. In microeconomics, we show that when a firm is in the inelastic portion of its demand line, cutting price will actually reduce TR. Maybe that is what happened to Wal-Mart. Prices have to be raised to increase TR. If you are on the elastic part of the demand curve, you need to lower price to increase TR.

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