ABSTRACT
The coffee shop had to know the quantity demanded at various price levels. Before going deeper into how firms should set, and adjust, the prices of their products or services to maximize profit, the authors present the fundamentals of the classical economic theory involved to explain the shape of price–response functions. To fully understand the shape of price–response functions, and how they may change with the price of competing products or services, we need a model of consumers’ behavioral choices. The theory of consumer behavior can be used to understand the relationship between consumers’ limited income and their consumption of various goods and services. The labeling of fixed, incremental fixed, or variable costs is not that important if the price managers have accurate descriptions of the total costs function.
