For simplicity sake, let’s assume I am the only supplier in a market and have the same goal of making profit as other firms do. Let’s say I produce 300 units of some good. I look at the demand schedule to gauge what consumers are willing to spend and see the following figures: when price is 50 dollars, 300 units are demanded, when price is 100 dollars, 200 units are demanded, and when price is 150 dollars, 100 units are demanded. Now, if we multiply each price by its corresponding quantity demanded, we’ll find that I’ll make the most money selling 200 units at 100 dollars (20,000 dollars). If I sell 300 units for 50 dollars or sell only 100 units for 150 dollars, I will only make 15,000 dollars. So clearly the right move here should be to sell 200 units for 100 dollars each. But wait. I have produced 300 units. This will leave 100 unsold. I would assume the next step is to drop the price down to 50 so I can sell the remaining 100. Is my intuition correct?
1 Answer
Your intuition is correct, provided this is a one-time situation that the buyers do not expected, nor a situation the company is trying to repeat every time production occurs. If a company wanted to operate in this way every month, customers will quickly learn that if they wait and don't buy the merchandise right away, the prices will eventually drop, and they can get it for cheaper.
What you are describing is the problem of "price discrimination". In general a firm would want to be able to sell the same good at different prices, for example, if you could sell the first 100 units at \$150, the next 100 units at \$100, and the last 100 units at \$50, you would make even more money than the strategy you proposed above (\$30,000 vs. \$25,000), but this is not a sustainable strategy, at least not in a naive way. There are some well known ways to implement price discrimination, for example, airlines do it all the time, selling seats to the same flight for very different prices, etc.
