# Price increase at stores

I got an economics question. Electrical Engineer here, who is just trying to understand economics, demand, inflation etc.

I was at a store the other day and noticed that the Taco sauce I buy always is priced at 2.59 rather than the regular 1.99. I understand that the health of the economy forces stores to change prices. I did not buy the Taco sauce.

Taco sauce is not something that is absolutely necessary to have in life.

The store could have kept the price at 1.99 and made 1.99 instead of increasing it to 2.59 and making 0. ( It made \$0 because I didn't buy the sauce).

I understand that stores need to make a profit, but doesnt it make sense that the store sell the item for 1.99 or 2.19 where it will atleast get sold ( and make a surviving profit till the economy gets better ) rather than sell it at 2.59 where it wont get sold as often?

I understand that stores need to make a profit, but doesnt it make sense that the store sell the item for 1.99 or 2.19 where it will atleast get sold ( and make a surviving profit till the economy gets better ) rather than sell it at 2.59 where it wont get sold as often?

It can make sense. Just because they loose you as a customer does not mean the business is less profitable.

First, it is supply and demand that changes the price. Supply and demand could depend on how the economy is doing but from your description it is not clear what actually resulted in the price increase. For example, 'non-fancy' taco sauce could be considered inferior good (which means people demand more of it if their income falls).

Hence if there is a recession people might demand more of the sauce which leads to higher price. Your personal willingness to buy might remain same so they loose you as a customer but they might have gotten other customers. People have heterogenous tastes you should not a priori assume that everyone derives the same marginal utility from consuming more taco sauce as you do. Thus in your example, we cannot even say with confidence that they are loosing sales (even if they lost you as a customers they might have gotten a lot of other consumers).

Second let us suppose that there wasn't actually an increase in demand for the taco sauce and thus increase in price will actually lead to lower quantity of taco sauce consumed. Well this still does not guarantee that the company will have lower profit. The decline in quantity consumed will depend on elasticity of demand ($$e=\frac{dQ}{dp} \frac{p}{Q},$$ where $$Q(p)$$ is the demand function which is function of price).

If elasticity of demand is for example $$e=-0.01$$, 1% increase in price $$p$$ will lead to only 0.01% decrease in quantity demanded from consumers. In such scenario their revenues would increase despite selling less products.

Third when a store sells less products it will also order less products so their total costs are lower as well. In fact depending on exact shape of a cost function even average costs could decline.

Fourth, even if we assume that you are the only customer who buys the taco sauce it might still be reasonable to increase prices. For example, if the company's costs for the sauce increased above the price it originally sold the price for, it might be rational for the firm to rather stop selling sauce altogether than incur loss on its sale.

As a consequence we cannot say rising prices was a priori bad business decision. You could certainly construct an examples where it would lead to decline in profit, but you can also construct examples where increase in price lead to increase in profits. Furthermore, even in the scenario where profits decline it is not a priory guaranteed that profits would not decline further if the firm would not rise price (e.g. there could have been some shock to firm's costs). Without specifying more parameters of the problem we can't comment on whether that was good or bad business decision.