Products, Services and Prices in the Free Market Economy
Board members, CEO's or business owners have to decide when to decrease or increase prices in order to maximize profits. "Price elasticity depends on the responses of consumers and producers to price changes. "The law of demand tells us that consumers will buy more of a product when its price declines and less when its price increases. The responsiveness (or sensitivity) of consumers to a price change is measured by a product's price elasticity of demand. For some products ?for example, restaurant meals- consumers are highly responsive to price changes." (McConnell & Brue, 2004, p.356.).
King Taco Restaurant, Inc was founded in 1974. King Taco Restaurants, Inc. is a chain of fast food Mexican restaurants throughout Los Angeles County. King Taco began its operations from a converted ice cream truck since then has expanded to 16 popular locations and has been ranked in the top 100 of Hispanic Business by the Hispanic Business Magazine. When a restaurant change the prices in a specific dish like the Mexican taco, customers may order other dishes from the menu or even find another restaurant but if the customer is loyal or like the way the restaurant cook the dish (seasoning, flavor, species), the response to the change in price could be different.
King Taco Restaurants, Inc. sells over 240,000 tacos a week at $ 0.95 cents a taco and under the new management, executives are considering maximizing profits minimum by 15% since they assume that are dealing with a perfectly inelastic demand for the taco dish but their concern is how much price they have to increase in order to achieve their goal. They hired a representative of University of Phoenix economic team MBA501 to help them decide and th ...