AboutWarren D. Miller, CFA, ASA, CPA Expertise My in-depth knowledge of economics is confined to three sub-disciplines: Austrian economics, industrial organization, and evolutionary economics. Other questions dealing with macroeconomics, the traditional neoclassical paradigm, labor economics, environmental economics, agricultural economics, health economics, and so on should go to those who have the appropriate expertise. N.B.: I DO NOT ANSWER QUESTIONS MARKED 'PRIVATE' because I believe that knowledge should be shared, not hoarded. I also believe that such questions are likely to come those trying to cheat.
Experience I work with Austrian economics (which is different in major respects from the traditional neoclassical model), industrial organization (which is about industry structure, conduct, and performance), and evolutionary economics (almost, but not quite, the economic analog of its biological counterpart) everyday in my work. I appraise closely-held businesses. Understanding, applying, and writing about these disciplines is an essential part of how I have made my living since 1993.
Organizations CFA Institute, Strategic Management Society, American Society of Appraisers, Institute of Management Accountants, Academy of Management, Culver Legion
Publications CFA Magazine, Valuation Strategies, Value Examiner, Journal of Advanced Property Economics, Harvard Business Review, American Fly Fisher, CFA Digest, CPA Expert, and Business Valuation Review, among others
Education/Credentials MBA - Oklahoma State (1991)
BBA - U. of Oklahoma (1975)
Chartered Financial Analyst designation (2006)
Accredited Senior Appraiser (2006)
Certified Management Accountant (1992)
Certified Public Accountant (1992)
Question Assume that 'starbucks' has to make a decision related to increasing or decreasing the price of a good or service that it sells. Given that the ultimate objective is to increase the company’s revenue, how would you use price elasticity of demand to determine whether to increase or decrease the price?
Answer Dear Suz--
Thank you for your question, and thank you for using AllExperts.com.
I'm afraid that I disagree with the premise of your question. In particular, I don't believe that "the ultimate objective is to increase the company's revenue." In economics, the "ultimate objective" of a company is maximizing its profit, however the company defines the word "maximizing."
I hasten to add that profit maximization might not mean--and, knowing what I know about Starbucks, I doubt very much that it does mean--making as much money as possible. Starbucks is well-known as a company with social concerns.
Putting that aside, however, the concept of the price elasticity of demand does indeed deal with revenue. This is a question that I have answered before on AllExperts.com. If you will look at the questions that were submitted tome on 10/12/07 ("Demand Elasticity" submitted by Kim) and on 12/24/2007 ("Price Elasticity of Demand" from Tobias).
Take a look at my responses to these and then please let me know if they helped you.
