Another former student asks:
Am I missing something here? What’s so remarkable about realizing that quantity demanded rises with a decrease in price? Are they just that dumb?
Well, no you’re not missing anything here, but obviously the reporters and possibly the Subway managements missed something in their Principles of Economics classes. Actually they missed three things.
First, you’re right. Lower the Price and people buy a larger quantity. Umm, that’s basic demand.
Second, apparently the Subway sandwich folks were also surprised that when they lowered the price it resulted in more total revenue! Well, as we teach in principles, if demand is price elastic, then a lower price results in more total revenue. We also teach that products with good substitutes are price elastic. When incomes decline, everything becomes more price elastic. News flash, folks, we’re in a recession and shoppers are price sensitive. That’s called elastic price elasticity of demand in techno-talk!
Finally, they seem surprised that overall profit margins didn’t decline. Well, they apparently don’t have a real good grip on their fixed vs variable costs. Selling more sandwiches doesn’t add to the rent or to the utility bill. Labor didn’t go up much since a 12 inch can be made in just about the same time as a 6 incher. Each one gets the same bag.
Yeah, reporters and a lot of managers don’t remember their principles of econ.